Financial Accounting and Equity Markets

By Philip Brown, B.Com., M.B.A., Ph.D., A.A.S.A.

Professor in Accounting, University of Western Australia

The Impact of the Annual Net Profit Report on the Stock Market*

I. INTRODUCTION

THEORIES about the fundamental determinants of share prices have existed for many years. One of the more impressive is that put forward by Miller and Modigliani¹, which relates the total market value of the firm to, among other things, its future earnings. But, like most others, the Miller-Modigliani (MM) theory is silent on how and when the investor learns about future earnings. This is not intended as a criticism of MM, because when testing their theory they were able to by-pass these questions …

Nevertheless the questions remain; and are interesting, for if ...