Testbank

to accompany

Contemporary Issues in
Accounting

Michaela Rankin, Patricia Stanton,

Susan McGowan, Matthew Tilling,
Kimberly Ferlauto & Carol Tilt

Prepared by
Matt Tilling

John Wiley & Sons Australia, Ltd 2012

 Chapter 8 Capital Markets Research and Accounting

Chapter 8 Capital Markets Research and Accounting

Multiple Choice Questions

1. Capital markets research focuses on the relationship between:

*a. Accounting information and capital markets

b. Capital markets and the economy
c. Accounting information and standards setting
d. Standards setting and accounting information

Correct answer: a
Learning Objective 8.1 ~Explain the role of capital market research for accounting.

2. One of the criticisms of capital markets research is

a. It focuses too much on social preferences

*b. It is mainly focussed on US data
c. It is only normative research
d. It is mainly qualitative

Correct answer: b
Learning Objective 8.1 ~Explain the role of capital market research for accounting.

3. Which of the following is NOT one of the three key assumptions underlying capital
markets research:

a. Accounting information can be used to form expectations about profitability

b. Expectations about profitability inform expectations about dividends
c. Expectations about dividends determine market price for shares
*d. None of the above, i.e. they are ALL assumptions underlying capital markets
research.

Correct answer: d
Learning Objective 8.1 ~Explain the role of capital market research for accounting.

John Wiley & Sons Australia, Ltd 2012 8.1

Testbank to accompany Contemporary Issues in Accounting

4. Which of the following factors are commonly considered by capital markets

research?
i. Accounting earnings
ii. Unexpected earnings
iii. Asset pricing
iv. Market efficiency

a. None of them
b. i. and iv. only
c. i., ii. and iv. only
*d. All of them

Correct answer: d
Learning Objective 8.1 ~Explain the role of capital market research for accounting.

5. To test whether accounting information and capital markets researchers examine:

a. The statements of shareholders about their decisions to sell shares

*b. The relationship between unexpected earnings and share returns
c. The relationship between expected earnings and share returns
d. The relationship between shareholder expectations and share price

Correct answer: b
Learning Objective 8.2 ~ Differentiate between an event study and an association study.

6. The kind of study used to examine how quickly accounting measures capture changes
in the information that is reflected in share prices over a given period is:

a. An events study
*b. An association study
c. A qualitative study
d. A normative study

Correct answer: b
Learning Objective 8.2 ~ Differentiate between an event study and an association study.

7. Information perspective studies have shown us that when compared to sophisticated

investors, unsophisticated investors:

*a. Overreact to good news and underreact to bad news

b. Overreact to news, both good and bad
c. Underreact to good new and overreact to bad news
d. Are little different to their reactions.

Correct answer: a
Learning Objective 8.3 ~ Outline the relationship between accounting measures of financial
performance and share prices.

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 Chapter 8 Capital Markets Research and Accounting

8. It has been found that prices often lead earnings. Why is this thought to be the case:

a. Accounting conservatism 'garbles' earning signals about firm value

b. Accounting statements are poor at incorporating information about human
capital and other intangibles
c. Accounting recognition criteria are less stringent for losses than for gains
*d. All of the above

Correct answer: d
Learning Objective 8.3 ~ Outline the relationship between accounting measures of financial
performance and share prices.

9. What phenomenon has been suggested as one of the most puzzling anomalies in
accounting research and calls into question the efficient markets hypothesis?

a. Income smoothing
*b. Post-earnings announcement drift
c. Signalling theory
d. Big bath write-offs

Correct answer: b
Learning Objective 8.3 ~ Outline the relationship between accounting measures of financial
performance and share prices.

10. Which of the following has been found to suggest that the users of financial
statements are either unwilling or unable to unravel the effects of earnings
management?

a. Managers using discretionary accounting to increase their compensation

b. Managers using income smoothing to increase share price
c. Management engaging in 'big bath' accounting.
*d. All of the above

Correct answer: d
Learning Objective 8.3 ~ Outline the relationship between accounting measures of financial
performance and share prices.

11. Which of the following is NOT a conclusion of capital markets research?

@Feedback - Learning Objective 8.3 Outline the relationship between accounting
measures of financial performance and share prices.

a. Accounting earnings are poor measures of relevant events that are

incorporated into share price
b. Investors react more quickly to bad news than to good
*c. Accounting information is not used by investors
d. Forecasts of future performance are core to valuation

John Wiley & Sons Australia, Ltd 2012 8.3

Testbank to accompany Contemporary Issues in Accounting

12. Which of the following is NOT a finding or assumption of capital markets research?

a. Capital providers consider auditors increase accounting information

credibility
*b. The qualification of a financial report will have a significant impact on share
price
c. The work of financial intermediaries impacts on share prices
d. Analysts' earnings forecasts are more accurate than time-series models of
earnings

Correct answer: c
Learning Objective 8.4 ~ Identify findings of capital market research relevant to accounting.

13. Voluntary disclosure theory predicts:

a. Increased disclosure lowers information asymmetry, thus increasing the cost

of capital.
*b. Disclosure will be biased but on average credible
c. Shareholders will always want increased and more accurate information
d. None of the above

Correct answer: b
Learning Objective 8.4 ~ Identify findings of capital market research relevant to accounting.

14. Value relevance studies attempt to assess the role of which qualitative characteristic
of the Conceptual Framework?

a. Relevance
b. Faithful representation
*c. Relevance and faithful representation
d. None of the above

Correct answer: b
Learning Objective 8.5 ~ Explain the role of information and information intermediaries in
capital markets.

15. Which of the following is NOT one of the three assumptions underlying value
relevance literature?

*a. Accounting earnings are not highly associated with equity market value
changes
b. Equity users are the dominant users of financial reports
c. Share prices adequately represent investors' use of information in valuing
equity securities
d. Share-price-based tests can measure relevance and reliability as defined by
accounting bodies.

Correct answer: c
Learning Objective 8.5 ~ Explain the role of information and information intermediaries in
capital markets.

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 Chapter 8 Capital Markets Research and Accounting

16. Value relevance studies have shown that

a. Reported earnings are good measures of value-relevant events

*b. Any relationship between accounting earnings and share returns is weak.
c. Losses are strongly associated with a firms ability to generate future cash
flows
d. None of the above

Correct answer: a
Learning Objective 8.6 ~ Distinguish between behavioural finance findings and mainstream
finance findings.

17. Value relevance research suggests which measurement model best links share price
and accounting information?

a. Accrual accounting
*b. Fair value accounting
c. Historic cost accounting
d. Cash accounting

Correct answer: b
Learning Objective 8.6 ~ Distinguish between behavioural finance findings and mainstream
finance findings.

18. Accounting studies testing market efficiency have conclusively found that

a. Markets are highly efficient

b. Markets are more efficient in the short term
c. Markets are efficient in the long term
*d. There is not conclusive evidence about market efficiency

Correct answer: b
Learning Objective 8.7 ~

19. Which of the following is not an anomaly that has been noted to the efficient markets
hypothesis

*a. Market prices appear to react to more than just accounting information
b. Returns of firms followed by analysts are superior to those that are not
c. Investor interest varies according to the market the share is traded in
d. The returns of small listed firms appear to be smaller than those of larger
firms

Correct answer: d
Learning Objective 8.7 ~ Discuss how behavioural research contributes to an understanding
of decision making.

John Wiley & Sons Australia, Ltd 2012 8.5

Testbank to accompany Contemporary Issues in Accounting

20. Which of the following is NOT an assumption behavioural finance?

a. People make systematic errors in their thinking

*b. People anchor on long term experience and under appreciate recent
experience
b c. People are over confident
d. People avoid realising paper losses but seek to realise paper gains

Correct answer: a
Learning Objective 8.7 ~ Discuss how behavioural research contributes to an understanding
of decision making.

John Wiley & Sons Australia, Ltd 2012 8.6