Development of Efficient Market Hypothesis

The development of the efficient market hypothesis has implications for the development of accounting theory and practice. It Is Important for accountants to realize that there are many intelligent analysts interpreting the data and, as long as sufficiently accurate information is presented, the analyst is likely to work around differences in the exact form of a balance sheet or income statement.

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For example, accounting practice might insist on the use of fair value for presenting marketable securities, but this should not preclude the presentation of other market values such s bold and offer prices In a footnote. There are several possible ways In which securities may be presented In a balance sheet. It Is possible that a prior’ reasoning may be able to suggest that one method is better than another method, and a more reasonable presentation might result in a decrease in information processing costs for the analysts.

The fact that there may be a conflict between the Investment criteria used and the performance measures means that corporate planning must take Into consideration the fact that all desirable investments (from the corporate standpoint) may not be vomited upward. It would be naive to expect a division manager to recommend a plant with 60 percent excess capacity where the analysis of mutually exclusive investments indicates that this is the best alternative, if the performance measures for a period of five years will be adversely affected by the choice.

Rather, the division manager Is likely to bury this type of alternative so that the board of directors Is not confused by the number of alternatives and this “undesirable” alternative specifically. The managers have a similar type of conflict when they evaluate major investments that satisfy normal investment criteria, but have adverse effects on the Rossi and earnings per share of the next few years because of conventional accounting.

The planner rejecting investments with positive net present values may gain short-run benefits (non-depressed earnings), but will have a long-run cost In that future earnings will be depressed compared to what they could have been. One alternative Is to use the recommended Investment criteria and hope to modify the accounting conventions that cause the distortions. Failing that, management can alternatively attempt to explain the characteristics of the investment (and the offered benefits) to the investing community.

The best solution would be for the accounting profession to encourage a wide range of depreciation methods, if these methods are Justified by the economic characteristics of the Investment. Currently, too rapid write-off (R, training, plant and equipment) leads to (1) bad measures of performance and (2) non-optimal decisions. Although performance measurement is a difficult task when exact reliable measures of income and investment are not feasible, it is necessary that all managers evaluate persons for whom they are responsible. Reference link: