Accounting Theory: Investor Decisions, EMH & Climate Risk Information

This essay delves into key concepts in accounting theory, specifically addressing the Efficient Market Hypothesis (EMH), its implications for lease accounting, and the growing importance of climate-related disclosures. It explores whether the choice of recording future lease payments as a liability or expense matters to investors under EMH, contrasting this with behavioral theories that suggest such choices can influence market perceptions. The essay also examines why companies voluntarily provide climate-related information, even when not quantitatively material, and discusses the significance of climate risk information for investors from an EMH perspective. The analysis considers the role of voluntary corporate reporting theories and the impact of mandatory disclosures on investor decision-making. Desklib provides access to this essay and a wealth of other resources for students seeking to deepen their understanding of accounting principles and practices.

Running head: ACCOUNTING THEORY
Accounting Theory
Name of the Student
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Table of Contents
Answer to Question 1.................................................................................................................2
Answer to part A....................................................................................................................2
Answer to part B....................................................................................................................2
Answer to Question 2.................................................................................................................3
Answer to part A....................................................................................................................3
Answer to part B....................................................................................................................5
References..................................................................................................................................6

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Answer to Question 1
Answer to part A
It needs to be discerned that in general the capital markets are efficient in fully
reflecting the relevant information in terms of determining the security prices. Even in case
the cash flows are same the consideration of the decision to record future lease payment is
taken into account as a liability. “Efficient Market Hypothesis (EMH)” is depicted as an
investment theory in which the share price is reflected as a information which is consistent
with the alpha along with the risk adjusted returns. Therefore, it needs to be seen that neither
technical nor fundamental analysis can be taken into consideration for the returns based on
risk adjustments. As per the EMH stocks, the trade pertaining to fair value is always traded at
a fair price as per the process of the stock exchanges thereby making it possible for the
investors for purchasing undervalued stocks or selling of the stocks at an inflated price. It
needs to be also seen that for a market it may not be possible to outperform the overall market
with the expert stock selection or setting market timing which is considered as the only
possible way to obtain higher returns for the purchase decisions in risky investments.
Henceforth, even if the cash flows are considered to be same, the decision of recording the
future lease payments in form of liability will not affect the investors. In order to provide an
evidence to such an instance, it needs to be seen that the UK stock market is weak in terms of
efficient with the consideration of the other studies related to the capital markets which are
pointed in semi-strong form of efficiency. It was found by Firth that the shares prices were
adjusted instantaneously which is regarded as per the strong form of efficiency (Hamid et al.,
2017).

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Answer to part B
In the beginning of the twentieth century a new breed of economists had put an
augmented focus on the psychological and behavioural element of the stock price and
patterns of the stock Price. Moreover, the economists were also able to make a controversial
claim towards the predictable patterns which enabled the investors to follow behavioural
element of the stock price. So that they are able to earn an excess of the adjusted rates of the
returns. This was the phase when the behavioural finance was popularised. The review of the
previous literatures for explaining the rational for the theories in accounting and
accounting/finance and capital markets has stated about the EMH resulting from a different
explanation on the choices relating to lease accounting. The various types of the opinions
from the previous papers has focused on the evaluating the inherent irrationality of the theory
of efficient market and discuss about the potential rationale for the recent declines in the
behavioural financing. Moreover, there are many studies which have highlighted for the
declining financial structure and argued about the role of favouring the same with
behavioural finance. Moreover, some of the other studies has highlighted on the theories
associated with behaviour and psychological which became the theoretical framework for
determining a successful and profitable investment (Rossi, 2015).
As per the Efficient Market Hypothesis, the investing markets are seen to be
informationally efficient in terms of having access to the relevant information and in
situations where the results cannot be exploited. The specific form of the theoretical model
generated is based on two main concepts which relates to availability and access. The daily
routine and lifestyle implications are seen in terms of time and methods available to access
the information. It needs to be further seen that the rapidity of the available information has
implication on the time and method of accessing information (Degutis & Novickytė, 2014).

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Answer to Question 2
Answer to part A
In general, the publishing of high quality of information is depicted to be critical in
terms of making effective decision making. It needs to be further seen that the consideration
of the various types of the mandated disclosure is stated in the voluntary corporate theory.
These mandated disclosures are regarded to be inclusive of the regulatory filings, financial
reports and information presented by the investors and along with the inclusion of the
different types of the ad hoc information. Therefore, it needs to be considered that the
depiction of the Corporate information publishing is not only important for the efficiency of
the capital markets but also including a wider audience beyond the investors. These are
depicted to be inclusive of stewardship and making the policy decision more robust in nature
(Arthur, 2018).
Many preparers of financial reports are of the opinion that the individuals need to
address the eve-expanding mandatory disclosures related to the investors driven demand and
demands pertaining to higher voluntary transparency. Additionally, regulatory stress on the
preparers of the financial reports has resulted in the perception of compliance of the
documentation rather than its relevance to the accounting information. The companies are
also obligated to produce climate related information on a quarterly basis which has led to the
opinion that the equity markets are too much concentrated on the short term results and less
effectiveness in the promotion related to the long term investments along with the focus on
delivering short-term results along with the consideration of the various types of other result
which are inclusive of the long term viability (Komariah, Mahbub & Sin, 2015).
The role of time horizon is also significant to identify whether risks are
material to a specific company and other risks originating climate change and become
significant in the long term. In 2016 a task force for climate related financial disclosure was

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formed. This task force provided relevant recommendations on voluntary climate-related
financial disclosure pertaining to the financial implications opportunities related to the
physical impacts of the climate change and transition to a low carbon global economy. In
addition to this, the Task force on the climate change related financial disclosure has
emphasized on establishment of a Financial Stability board without considering its effect on
the disclosure of these risks and financial implications of the climate change related risks and
correct pricing (Nadarajah & Chu, 2017).
Answer to part B
As per the Efficient Market Hypothesis the significant decision of a financial investor
is identified with the composition of an optimal portfolio. However, in case the market is not
efficient in nature there may be other considerations which are needed to be made. There may
be possibility of including gains from selling of an asset which are seen to be based on
buying an under-priced asset. This is depicted to be important in form of identification of
mispricing and detection of such assets which are related to the effect of the climate change
(Kamal, 2014). In case of detection of any error pertaining to climate change the assumption
of the factors such as overpricing of GHG emission needs to be taken into account. There are
also assumption which relates to the other type of the factors which are seen to be based on
the identification of the tests associated to EMH. Therefore, in most of the cases the
companies are seen to be relevant with the maintaining of the considerations are per the
compliance of the guidelines as stated under EMH. This concept is conducive in terms of
instantly arriving at a new information relevant to the any issues in the pricing of the climate
change factors (Altin, 2015).

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References
Altin, H. (2015). Efficient market hypothesis, abnormal return and election
periods. European Scientific Journal, ESJ, 11(34).
Arthur, W. B. (2018). Asset pricing under endogenous expectations in an artificial stock
market. In The economy as an evolving complex system II (pp. 31-60). CRC Press.
Degutis, A., & Novickytė, L. (2014). The efficient market hypothesis: a critical review of
literature and methodology. Ekonomika, 93(2).
Hamid, K., Suleman, M. T., Ali Shah, S. Z., Akash, I., & Shahid, R. (2017). Testing the weak
form of efficient market hypothesis: Empirical evidence from Asia-Pacific markets.
Kamal, M. (2014). Studying the validity of the Efficient Market Hypothesis (EMH) in the
Egyptian exchange (EGX) after the 25th of January revolution.
Komariah, K. S., Mahbub, C., & Sin, B. K. (2015). Efficient Market Hypothesis Approach to
Predict USD/IDR Trends using Twitter Sentiment Analysis. Database, 6, 12th.
Nadarajah, S., & Chu, J. (2017). On the inefficiency of Bitcoin. Economics Letters, 150, 6-9.
Rossi, M. (2015). The efficient market hypothesis and calendar anomalies: a literature
review. International Journal of Managerial and Financial Accounting, 7(3-4), 285-
296.