Term
| What is the Certainty Equivalent? |
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Definition
| The point of break even-- Equality |
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Term
| What is Market Efficiency? |
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Definition
| Relationship between security prices and information – is there a relationship? |
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Term
| An Efficient Market fully reflects what information about prices? |
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Definition
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Term
| What are the three hierarchies of "all information"? |
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Definition
- Strong Form
- Semi-Strong Form
- Weak Form |
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Term
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Definition
| Security prices reflect ALL information- Private and Public info |
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Term
| Semi- Strong Form aka " market efficiency" |
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Definition
Security prices reflect ALL information made publicly available
Therefore, it is not based on all information |
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Term
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Definition
Security prices do not reflect ALL information made publicly avaiable
- Anomalies |
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Term
| Should past stock prices with weak form be used to predict current prices? |
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Definition
| No because it is based on only some information |
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Term
| Should information with weak form, based in markets outside of the U.S,. be used? |
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Definition
| No..although china is getting better |
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Term
| Does strong form normally exist? |
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Definition
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Term
| Characteristics of an Efficient Market |
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Definition
- Reflect public information at all times
- FULLY reflect public information at all times
- All information is immediately impounded
- Efficient markets are a "fair game"-- cannot earn excess returns |
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Term
| What is the normal rate of return? |
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Definition
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Term
| Rational Investing reflects what type of investor? |
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Definition
| The average, risk averse investor |
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Term
| Security prices are based on the ___ of the individual investors consistent with fair game? |
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Definition
| Margin aka their "collective decision" |
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Term
| What are some reasons investors make different buying decisions? |
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Definition
- Difference in risk preference
- Different information available
- Different spending habits |
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Term
| Accounting competes with other sources of information such as... |
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Definition
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Term
| When individual investors make errors, how do these errors affect the market? |
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Definition
| They are averaged out on the market level-- therefore, nothing really happens. |
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Term
| What were the FASB objectives in Beaver 1973 research? |
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Definition
- Full disclosure of accounting principles
- Attempted to disclose more information regarding cash flows
- Substance over form |
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Term
| What is more important to an investor- recognition or realization? |
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Definition
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Term
| Financial statements protect ___ |
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Definition
| Individual investors, especially naiive ones |
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Term
| What is the role of accounting according to Beaver? |
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Definition
- Increase public information
- Improve upon the market
- Prevent abnormal (excess) returns due to private information - Limit insider info and limit superior info |
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Term
What is each party concerned:
- Investors:
- Financial Reporting Regulators:
- Management:
-Auditors:
- Information intermediaries: |
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Definition
- Investors: understanding investing behavior-- what will make them money
- Financial Reporting Regulators: That investors have the information they need to make decisions
- Management: SH wealth-- stewardship role
-Auditors: Liability, resource allocation, accrual accounting
- Information intermediaries: That the information is accurate and the processing is correct |
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Term
What is a fully informative share price?
Does this exist in the real world? why?
Who discovered this? |
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Definition
Fully reflects all public information (semi-strong form)
No, because there is a logical inconsistency-- if share prices were fully informative, the market would explode. There would be no losers
Grossman (1976) |
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Term
| Why do share prices not self-destruct? (2 reasons) |
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Definition
1. Noise trading
2. Share prices are only partially informative |
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Term
What is meant by Noise Trading?
What does noise trading create? |
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Definition
Noise traders are traders who attempt to deviate the price from the fully informative price. This introduces a random component to the share price
A need to constantly gather information, a need for full disclosure. |
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Term
| What is the Expected Value of Noise trading? |
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Definition
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Term
| The Iowa Electronic Markets is what type of market? |
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Definition
| Small-scale, real-money futures markets where contract payoffs depend on economic and political events such as elections |
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Term
| The Iowa Electronic Markets are affected dramatically by what factors? |
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Definition
| Individuals trading on beliefs |
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Term
| Information Asymmetry is caused by what? |
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Definition
| Investors knowing both Public and Private (insider) information |
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Term
| Who causes Information Asymmetry? |
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Definition
- Inside Management
- Sophisticated investors vs. naiive investors |
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Term
| What does asymmetry lead to? |
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Definition
Information Risk-- Incomplete (unfair) markets and opportunities for insiders to profit
Moral Hazards
Adverse selection |
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Term
| What is the meaning of Moral Hazard (caused by Asymmetry)? |
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Definition
-Individuals have an information advantage and use it to their benefit
- Shirking: Managers provide less than best effort
- Insider trading |
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Term
| What is the meaning of Adverse Selection (caused by Asymmetry)? |
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Definition
| Investors make decisions in their own best interest |
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Term
| What are the impacts of insider information on share trading? |
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Definition
- Market Withdraw: investors leave the market
- Price Protect: dealing with someone with inside information you’re going to pay way less |
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Term
| Lemons problem by Akeroff (1970) tested the used car market in hopes of finding information about ___ |
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Definition
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Term
| What were the findings of the Lemons problem by Akeroff (1970) (testing the used car market) |
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Definition
- Sellers know more about the used car than the buyer
- Buyers bid prices down on all used cars
- Good used cars are not put on the market
- Market is dominated by "lemons"
- Further downward price pressure |
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Term
| What is the effect of information risk (estimation risk) on share prices? |
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Definition
| - drives price down to a discounted amount |
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Term
| How can we control information risk? |
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Definition
- Implement laws regarding insider trading
- Disclose all information with financial reporting-- disclose MORE
- Make fundamental (private information) not occur |
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Term
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Definition
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Term
| Under the decision theory, investors will choose the alternative with the highest expected ___ |
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Definition
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Term
| Rational investors are most offten assumed to be |
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Definition
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Term
| Under Bayes Theorem, what is a likely reason that the main diagonal probabilities are high? |
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Definition
| Ideal conditions are nearing what is being acheived. |
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Term
| A table that provides the objective probability of each possible financial statement evidence item conditional on each state of nature is referred to as ... |
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Definition
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Term
| Probabilities that are revised following receipt of new accounting information are referred to as ... |
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Definition
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Term
| Highly informative financial statements are...? (3 things) |
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Definition
- Transparent
- Accurate
- Of a high quality |
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