Synergy between Accounting Disclosures and Forward-Looking Information in Stock Prices
28 Pages Posted: 25 Jan 2015
Date Written: January 24, 2015
It is often noted that accounting information, while faithfully estimating current profitability, fails to reflect forward-looking information about new ventures. Stock prices, however, reflect the prevailing sentiment about both current and future activities. As a result, though accounting is viewed as an important information source, stock price reactions are the primary gauge of how new technologies are expected to fare. With this in mind, we develop a model of accounting disclosures when market prices serve as a useful tool to inform the use of emerging technologies. We demonstrate that the information in accounting reports about current activities can indeed prove useful in improving decisions about new activities. In addition, we also demonstrate a synergy between accounting reports and market prices in guiding strategies – the more the forward-looking information that can potentially be gleaned from price, the more vital accounting information about current activities proves.
JEL Classification: M41
Suggested Citation: Suggested Citation