The Role of Accounting in The Society

Question: Discuss about theRole of Accounting in The Society. Answer: Introduction Ball and Browns contribution to accounting practice are unquestionable. Many people regard the duo as celebrated accounting researchers due to their immense contribution to the capital market research. This paper seeks to investigate and present a detailed discussion using Ball and Brown (1968) work to explain the rationale, method, and findings and link it to the development capital market research. The authors wanted get an answer to a modest central research question. The question raised was; are numbers useful in accounting? (Ball and Brown 1968). The results of Ball and Brown (1968) will be helpful in this paper in highlighting the significance and importance of the contribution of the two authors in capital market research. Rationale The logic of both Ball and Brown to engage in the study (1968) was to empirically evaluate accounting income in numbers to illustrate the connection between information in financial statement and the stock prices. No one had empirically tested the connection between what the firm said would be the EPS (earning per share), some alterations to such projection as well as price of shares a year to come. The existing literature on accounting during mid-1960 was dominated by a priori perspective and less regard to empirical testing (Ball and Brown 2013). The research held a central conclusion that the information contained in the financial statement generated based on the then rules of reporting was worthless to the stockholders. It was also centrally agreed that radical alterations like information entailed in financial statements were required. There was, therefore, a consensus at the time that was no relationship between financial data and stock prices since they embraced the data accumulation computed based on the different guidelines (Fama et al. 1969). Accordingly, studies and debates predominantly circumvented the second conclusion that rules regulating financial statement needed alteration. Accounting literature then deemed unfruitful to investigate how information contained in the financial statements affected or related to stock prices. It was upon this basis that Ball and Brown (1968) study was the premise to test this connection empirically. Method Ball and Brown used a method that relates accounting income to the prices of stock to empirically test for the association between stock prices and information contained financial statement. The method was anchored on the theory that offers a justification for choosing the security price behavior as an operational test of usefulness (Malkiel. and Fama 1970). They believed that the information manifested in income numbers is useful. They then based their method on this theory and evidence and focused on information particular to one firm. They constructed two alternative models of the expectation of income to be by the market. The two authors then investigated the reaction of the market when market expectation prove false. The authors embraced the view of information in their study and measured the variance between the likely income variation and tangible alteration of revenue. They also showed how such change influenced stock prices (Bernard and Thomas 1989). The authors were measuring the forecast errors unexpected component in earning announcements (Ball and Brown 1968, p.162). They used a simple random walk model as well as a model which regulated effects of the market currently termed as earnings surprise. Finding Ball and Brown (1968) empirically proved that accounting information was indeed correlated with the changes in share prices and hence it was no longer attainable to conclude that accounting information was meaningless to investors. They were able to prove the hypothesis that alterations in the prices of shares integrated material variations in primary company value to some levels. The authors confirmed that most increases in the abnormal returns were before announcement date indicating the accuracy of the forecast of whether companies outperform or underperform. They discovered that stocks showed affirmative income surprise and that nonstandard earnings for the window of events remained probably to be constructive. Importance/Contribution to Capital Markets Research The study initially received a tepid reaction from the academicians but later converted to the seed that made a difference. This research became the origin of the extensive contemporary frame of research explicating the ways investors use the financial information as well as the impacts of such information on returns of share price. Ball and Brown (1968) triggered the transformation of the accounting study by illustrating that there is an association between the changes in the prices of shares and the information entailed in the financial statement reports. The two researchers were inspired by the lack of any empirically testing to prove the earlier hypothesis on whether there was a linkage between what the firm expected the earning per share to be, any alterations to that forecast as well as its share price twelve months later. Ball and Brown (1968) study was, therefore, a groundbreaking study that led to the currently accepted association between accounting information and the security prices hence the bedrock from investment processes. The uncovered the empirical evidence since that concluded that financial statement information prepared under the then available reporting guidelines had a useful meaning to investors (Beaver 1968). References Ball, R. and Brown, P., 1968. An empirical evaluation of accounting income numbers. Journal of accounting research, pp.159-178. Ball, R. and Brown, P.R., 2013. Ball and Brown (1968): A retrospective. The Accounting Review, 89(1), pp.1-26. Beaver, W.H., 1968. The information content of annual earnings announcements. Journal of accounting research, pp.67-92. Bernard, V.L. and Thomas, J.K., 1989. Post-earnings-announcement drift: delayed price response or risk premium?. Journal of Accounting research, pp.1-36. Fama, E.F., Fisher, L., Jensen, M.C. and Roll, R., 1969. The adjustment of stock prices to new information. International economic review, 10(1), pp.1-21. Malkiel, B.G. and Fama, E.F., 1970. Efficient capital markets: A review of theory and empirical work. The journal of Finance, 25(2), pp.383-417.