The Efficient Market Hypothesis and Accounting Data: A Point of View.

Abstract The article reports that the efficient market hypothesis (EMH) is a descriptive theory of the institutional nature of the securities market (NYSE). The reaction of the market to accounting data which is systematic and unbiased does not only reflect the properties of the market but indicates also the relevance of accounting data. It does not imply, however, that such accounting data is generated by an optimal process or procedure. Nor does it indicate that the market will react exactly in the same way and magnitude if the accounting process were different, even though the reaction will still be efficient indeed. One ought not to confuse the two issues: the quality of the market and the quality of the accounting numbers. The latter affects the former only if it is known. The research undertaken by many accountants on the subject pinpoints a strong relationship between accounting information and the EMH. The market absorbs and assimilates accounting data and reacts to it systematically and without bias. For example, a change in the supply and demand functions of the market after earnings announcements can be interpreted as a reaction of the market to such an accounting signal.