Homework SourseThe CEO of High Tech International decides to change an acco
The CEO of High Tech International decides to change an accounting method at the end of the current year. The change results in reported profits increasing by 5%, but the company’s cash flows are not changed. If capital markets are efficient, then
A. The stock price will increase due to higher profits
B the stock price will not be affected by the accounting change
C the stock price will decrease because accounting method changes are not permitted under generally accepted accounting principles
D the stock price will increase only if the accounting change will also result in higher profits in the next year
The CEO of High Tech International decides to change an accounting method at the end of the current year. The change results in reported profits increasing by 5%, but the company’s cash flows are not changed. If capital markets are efficient, then
A. The stock price will increase due to higher profits
B the stock price will not be affected by the accounting change
C the stock price will decrease because accounting method changes are not permitted under generally accepted accounting principles
D the stock price will increase only if the accounting change will also result in higher profits in the next year
A. The stock price will increase due to higher profits
B the stock price will not be affected by the accounting change
C the stock price will decrease because accounting method changes are not permitted under generally accepted accounting principles
D the stock price will increase only if the accounting change will also result in higher profits in the next year
Solution
B) The stock price will not be affected, as the in case of Efficient Market Hypothesis it is assumed that the Investors have the complete knowledge of the insiders information and anything disclosed in public by the corporation is already known to him, so there would be no impact on the stock price.
