A researcher finds evidence of a security price reaction to an item of accounting information during a narrow window of three days surrounding the date of release of this information and claims that it was the accounting information that caused the security price reaction. Another researcher finds evidence of security price reaction to a different item of accounting information during a wide window beginning 12 months prior to the release of the financial statements containing that item. This researcher does not claim that the accounting information caused the security price reaction but only that the information and the market price reaction were associated.
Explain why one can claim causation for a narrow window but not for a wide window. Which price reaction constitutes the stronger evidence for usefulness of accounting information? Explain.

  • CreatedSeptember 09, 2014
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