Ball and Brown's 1968 research has become a foundation for much of accounting research for over 50 years. Ball and Brown used an event study to look at how market prices correlated with the release of companies' annual reports. Specifically, they looked at how the information content of the annual reports affected market returns from the shares of the company (e.g., if firms providing good news provided increasing value to their investors).

a) Discuss how,you might evaluate whether the information content of the annual reports was good or bad news. Be specific and do not just repeat what Ball and Brown did in their study but think about how studies similar to this would evaluate information content. Provide at least two specific examples.

b) Explain,  what you expect to find when looking at market returns in the periods after the annual reports are released and why this will happen. Specifically, what will happen when good news is released versus when bad news is released?

c)  If you found that the market return was more closely associated with the information content in the annual report now as compared to 10 years ago, what might that say about the usefulness of accounting information. (Again, be specific about the course concepts you use in your explanation.)

Answer rating: 100% (QA)

a Evaluating whether the information content of annual reports is good or bad news involves analyzing various financial metrics and qualitative information disclosed in the reports Here are two specif... View the full answer