SUMMARY OF ARTICLE
As earnings forecasts for Commonwealth were downgraded by analysts due to the slowly growing revenue and rising bad debts, shares in Commonwealth Bank were under pressure. The share price of Commonwealth suffered the largest loss and dropped by $1.27, or 3.5 percent, to $35.47. In addition, the stock price of Big Four banks reacted in the same way. National Australia Bank was down 54c to $21.18. The share price for Westpac decreased by 40c to $20.20 and ANZ Bank closed down 34c to $15.37.
ACCOUNTING THEORY ISSUE:
The accounting issue encapsulated in this article is the responsiveness of the share price to earnings forecasts, one form of publicly available information. More importantly, such impact was not limited to the company to which the forecast was directed, specifically Commonwealth, but diffuses onto the other banks in the industry in general as well.
ACCOUNTING THEORY APPLICATION:
As per EFFICIENT MARKET HYPOTHESIS, the Australian equity market is generally consistent with its semi-strong efficient form (Watts and Zimmerman, 1986; p.19). All publicly available information, including all financial statements and other financial disclosures, will be rapidly and fully impounded into share price in an unbiased manner in the semi-strong efficient equity. In particular, an increase in share price indicates a good news and vice versa. If there is no price movement after the release of information, it is evidenced that the information fails to provide something new or all the information has already been anticipated. Simply put, it does not have information content. Ball and Brown (1968), for instance, specifically 3
concluded that unexpected earnings announcement has an impact on share prices. Investors generally respond to new information that significantly revises their valuation as to the potential future cash flows attributable to the company, and this...