Efficient Capital Markets and External Accounting.

Abstract The purpose of this article is to present a framework that should be useful in making evaluative and prescriptive statements about accounting, developing testable hypotheses, and interpreting the results of hypothesis tests. The dichotomization of accounting into "external" and "internal" accounting may be distasteful to some. It seems that the dichotomy is unnecessary in developing a general perspective of accounting. The efficient markets model implies that market prices adjust "instantaneously" and unbiasedly to new information. Hence another method of testing the model involves examining market reactions to new information that is publicly available, such as earnings announcements, stock-split announcements, and dividend announcements. The theory and evidence regarding the efficient markets model have some important implications with respect to the context within which the accounting process functions. In particular, it appears that the accounting process does not possess strict "monopoly power" over the supply of information pertinent to the valuation of a firm. Instead, it appears that the accounting process functions within a competitive context. Some implications of these propositions will be considered shortly.