A firm reports earnings this quarter that are 50 % higher than the same quarter last year,
Question:
A firm reports earnings this quarter that are 50 % higher than the same quarter last year, that greatly exceed analysts' forecasts. The firm's share rises following the earnings report, but by much less than would be expected based on the increase in earnings.
REQUIRED
A. Give, and briefly explain, four reasons for the low rise in share price following the earnings report that are consistent with efficient securities market theory and investor rationally.
B. You notice, however, that the firm's share price drifts upwards for some time following its earnings announcement. Give separate explanations for the initial under reaction and subsequent upward drift based on two investor's behavioural biases. Be sure to identify the specific behavioural biases you draw on.
C. Suppose that a new accounting standard requires improved disclosure for low-persistence items included in net income. Does this new standard benefit investors? Does it benefit society? Explain your answer.
Financial Statement Analysis and Security Valuation
ISBN: 978-0078025310
5th edition
Authors: Stephen Penman