Efficient securities market theory has long been under attack from behavioral finance, which draws on psychological theories of investor behavior to explain why security prices do not always behave as the economic theories of rational investing and market efficiency predict. These attacks have increased following the 20072008 security market meltdowns.

Required a. Give two reasons why prospect theory predicts that security prices will differ from their prices under efficient security markets theory.

b. Describe two accounting-related efficient securities market anomalies and, for each, explain why it is an anomaly.

c. The efficient securities market anomalies suggest that investors underreact to the full information content of financial statements. Identify two behavioral characteristics that predict this underreaction and, for each, explain why it predicts underreaction.

d. Should accountants be concerned that the importance of financial reporting may decline if behaviorally biased investors do not use all the information in the financial statements?