This course will discuss how accounting information is processed by capital market participants to price equity securities. The course reading material largely comprises academic papers in accounting research. Therefore, the course starts with a general introduction to accounting research and provides students with a solid framework to read and understand academic papers in accounting research (session 1). In the next session, students learn about the mechanics of capital markets (lemon’s problem, role of financial and information intermediaries etc.) and accounting literature on market efficiency (session 2). After learning that markets are not necessarily perfectly efficient, single securities can be mispriced and accounting information is important to resolve information asymmetries, students learn about valuation models using dividends, cash flows or accounting earnings and how these models theoretically and empirically relate to each other (session 3). The course then proceeds with a discussion of earnings (quality and management) and cost of capital - two drivers of firm value in the valuation model used - in the next sessions. Session 7 closes the course with a discussion on the relevance of earnings to price securities in general.
Introduction to accounting research
Accounting information and the capital market
Firm valuation using accounting information
Are accounting earnings informative? Earnings Quality
Are accounting earnings informative? Earnings Management
Does accounting information affect firms’ cost of capital?
Is accounting information relevant and/or reliable to value firms?
After successfully completing this course, students will have the ability to read and understand research in international accounting. Additionally, students will get a comprehensive overview of research topics in international accounting research on capital markets. Specifically, students will be able to answer the following general questions after completing this course
- How does accounting information interact with capital markets and their participants?
- How do capital markets work?
- Are capital markets efficient?
- Can single securities be misprices in an otherwise efficient market?
- Why is accounting information important for investors?
- Can investors use accounting information to identify mispriced securities?
- What are the theoretical approaches to value a firm?
- What is the dividend discount model?
- What is the free cash flow discount model?
- What is the abnormal earnings discount model?
- Do all models yield the same value? Theoretical and in the real world? Why/Why not?
- Are accounting earnings informative?
- Why are earnings a well-suited accounting metric to value a firm compared to dividends or free cash flow? Does accrual data contain information for better valuation?
- What are the attributes, determinants and consequences of earnings quality?
- What are managers’ incentives to manage earnings?
- What are the capital market consequences of managed earnings?
- Can accounting information lead to lower cost of capital and increase the value of a firm?
- What impact has voluntary disclosure on firms’ cost of capital?
- Is earnings quality associated with firms’ cost of capital?
- Is accounting information relevant and/or reliable to value firms?
- Is there an association between accounting amounts and equity market values?
PI - 80% minimum presence in lectures.
Overall the course is research oriented. After relevant theoretical knowledge is provided by the instructor in class, students are required to actively participate in class and discuss contents and methods of selected research papers. The discussion is guided by the instructor. Students are expected to read and prepare selected research papers in advance for each class.
Students’ assessment is based on multiple types of assessment to provide students with extensive opportunities to demonstrate their acquired skills.
1. Report on assigned paper (40% of course grading)
At the beginning of the course, each student is assigned a research paper that the student has to work on during the course. Students are required to hand in a report of the assigned paper at the end of the course. The report should consist of the following parts, which are covered in lectures:
a) Executive summary of a research paper (2-3 pages)
Students have to write a short executive summary of the paper assigned covering the research question of the paper, the paper’s motivation, theory and the results.
b) Literature review (3-4 pages)
Students have to find sufficient papers related to the assigned paper’s research question and shortly summarize them including a statement on the papers’ research question, methodological approach and results.
The report on the assigned paper constitutes 40% of the course grading.
2. Final written exam at the end of the course (40% of course grading)
Students take a final exam at the end of the course, which covers the topics and techniques dealt with in the course.
The final exam constitutes 40% of the course grading.
3. Homework and in-class participation (20% of course grading)
Students have to prepare for each lecture and actively participate in class.
Homework and in-class participation constitutes 20% of the course grading.