Impact of Accounting Theory & Practice on Capital Market Growth

This report explores the intricate relationship between capital markets and accounting practices, emphasizing the emergence of capital markets, the necessity of statutory bodies, and the transformative changes in accounting standards. It highlights the benefits of complying with these standards, including increased transparency, comparability, and reliability of financial reporting, which in turn attracts investors and fosters market efficiency. The analysis covers the impact of IFRS adoption on stock markets, the role of accounting policies in reinforcing foreign equity investments, and the importance of transparency in attracting investors. The report concludes that adherence to accounting standards enhances the relevance of financial reporting, promotes comparable accounting data, and supports the overall stability and growth of capital markets. Desklib provides access to this and other solved assignments for students.

[Date]
Accounting theory
Accounting theory and practice

Contents
Introduction.........................................................................................................................................3
Capital Markets and Accounting.......................................................................................................3
Emergence of capital market.................................................................................................................3
Need for statutory bodies in capital market...........................................................................................4
Changes in the accounting standards for the capital market..................................................................5
Benefits to capital market if complying with the accounting standards.................................................6
Enforcement to apply accounting standards to the capital market.........................................................7
Transparency through accounting standards attract investors................................................................7
Conclusion............................................................................................................................................8
References............................................................................................................................................9

Introduction
With the increasing integration of the economies, it is quite visible that capital market has
been extended because of advanced technology and assistance from government. The global
economy views that increasing trend of FDI (foreign direct investment) and FII (Foreign
institutional investments), financial and accountancy reporting will change to check whether
each transaction has been recorded and also the check it is not harming the national economy.
The report brings out a discussion on capital market and accounting. The report discussion
shows the relationship between capital markets and accounting (Hasibuan, and Syahrial,
2019).
This will include studies of market reaction on the newly launched accounting standards and
policies, which brings out capital gain tax imposed on capital tax. It is important to know that
there is a long-term association between newly accounting rules and stock returns. The core
objective of this report is to assess whether research conducted under policies of accounting
evaluation, which is useful in availing data to the investors. Capital market is the part of
financial market. Furthermore, the report discusses the issues and progress confronted after
implementing the accounting reporting needs, feasible course of actions to gain global
harmonisation, and interactions between international capital markets and accounting policies
(Jermias, 2017).
Capital Markets and Accounting
Emergence of capital market
It has been seen that with the emergence of multinational markets, the requirements of every
business has increased and one person is able to hold and invest a capital of more than 5
million alone. A person necessarily needs assistance from others while establishing the
business. Therefore, the total capital was divided into shares and each individual asked for

favour in the organisation as far as the earnings are concerned (Hasibuan, and Syahrial,
2019). Total capital structure was not limited to power and holding distribution among the
shareholders but according to the experts of financial markets, each company should maintain
a particular amount of debt to reduce the empowering decision of shareholders on every
agreement of organisation. This concept gave a commencement of capital market (Nordin,
and Nordin, 2016).
Need for statutory bodies in capital market
Furthermore, in order to keep a check on capital markets and operations, the government has
authorised body such as SEBI in India and Australian Stock Exchange (ASX) in Australia.
This limited was formed in 1987 and enacted by the Australian Parliament. The functions of
ASX include overseeing of compliance related to operating rules and the promotion of
corporate governance for the Australian listed companies and it tries to educate the investors
and protect them from external frauds in the capital markets. The international customer base
of ASX is quite diverse, which includes corporations, trusts, hedge funds, trading banks,
investment banks, and brokers (Aggarwal, 2017).
Financial market refers to market consequences in which financial markets such as
debentures, bonds, shares, assets, derivatives, and trading. It is quite important in allocating
limited resources. Different types of financial market cover stock market, bond market,
derivative market, determination of price of securities, and creating liquid financial assets
(Qiu, Ma, and Xu, 2018).
Capital market is a financial market, which includes selling of long-term debt and equity
securities. It is seen that private companies often avail browser platforms, which will allow
people to trade shares. For the last years, it is seen that there has been a tremendous changes
in capital market. It helps in channelizing surplus money from the savers to the institutions,
which the company will invest in productive. This act leads to generation of profits and

multiply the investment returns. Capital market has led to mobilising of resources and
allocating them to the productive channels (Qiu, Ma, and Xu, 2018). The process of
economic growth has been facilitated by the capital market. The productive channel
contribute towards the economic growth, it promotes saving habits, and creates stable and
systematic security prices. After emergence of capital markets, institution provisional policy
and the taxation system allow the investors to save more. The capital market assists to
stabilise price of stocks. Two important instruments include stocks and bonds, which are
being traded in the capital market. Capital market serves a linkage between investment and
savers opportunities. Investors earn money through long-term investments, which helps in
capital formation as it offers opportunities for investors to have surplus money and create
value in other type of investment (Barthelme, Kiosse, and Sellhorn, 2019). For instance- a
company needs fund to expand business where it plans to increase the needed funds by
issuing new securities. After bringing the shares to the market, people who have their
interests while buying shares after researching regarding company and finally buy shares
through IPO (Initial public offerings) (Barthelme, Kiosse, and Sellhorn, 2019). It has been
seen that Australian capital market have undergone several developments over the last few
years such as new measures of the risk management, awareness campaigns for investors,
investigations, T+2 settlement cycles and stopping insider trading. ASX has tried to launch
several measures to minimise the price volatility, as excessive volatility will represent risk
and uncertainties (Nordin, and Nordin, 2016).
Changes in the accounting standards for the capital market
Integration of world markets will need for reliable financial data with an aim to support
several transactions. There were several regulatory initiatives, which has been undertaken at
national and international level while treating it with issues created with the difference in
accounting standards in different nations (Christensen, Hail, and Leuz, 2016). The findings

were positive for the investors, which give tremendous benefits because of IFRS adoption to
capital markets such as higher following by the analysts, low cost of capital, improve
liquidity of markets and there was an increase in the listing procedure by companies.
Accounting regulations have been formulated after the understanding of how capital market
generates capital gain. High quality of the accounting standards are important for efficient
functioning of market economy (Jermias, 2017). While ensuring the quality of financial
information for the capital markets do not rely on accounting bodies and standards. Quality of
reporting will result from use of accounting standards but they are most influenced by the
business conditions and the regulatory systems (Nasution, Wardayani, and Muda, 2018).
Benefits to capital market if complying with the accounting standards
From the research study on IFRS and capital market, it is seen that adopting IFRS will
increase transparency, comparability, reliability, and relevancy of the financial reporting
increasing the efficiency of quality of financial reporting (Siswantoro, 2018). Capital markets
have greater access to quality data and make investments in long term. From the descriptive
statistical reports, it is seen that the impact of IFRS adoption on stock market in Nigeria for
2011 and 2012 of accounting reporting has increased the credibility of reports (Gao, Jiang,
and Zhang, 2019). Furthermore, the government of Europe has mandated the adoption of
IFRS especially to the stock return movements with its price. The organisations have used
several regression models to analyse the impact of accounting standards on organisation
(Gao, Jiang, and Zhang, 2019). The effect of adopting IFRS on share price and trading
volumes has been conducted, which shows that data regarding the abnormal earnings and
trading through return on volatile stocks. Furthermore, it is seen and reported that correlation
matrix related to stock earnings have been measured by market index with the integration of
markets. The result of this gulf countries state that capital market has experienced higher

level of integration as compared to the pre-adopting IFRS (Yan, Khumawala, and
Ranasinghe, 2019).
Enforcement to apply accounting standards to the capital market
It is seen that IFRS reduces accounting practises that facilitates effective movement of
capital. Several regressive models are used to examine market liquidity contributing to
comparable accounting data. The adoption of IFRS (accounting standards) on the investments
in the cross border equity at stock market (Siswantoro, 2018). This shows that the stock
experiencing through increase in trading actions in market after complying with the
accounting way of recording the transactions (Barth, Cahan, Chen, and Venter, 2017).
Appropriate accounting policies led to reinforced investments in the foreign equity by the
shareholders, which is not limited to the professional investors. The company gets several
benefits if it complies with the accounting systems such as reduction of data in a symmetrical
way, which is due to the increasing disclosure in financial statements (Yan, Khumawala, and
Ranasinghe, 2019). The company will get the benefit of reducing cost of capital because of
higher transparency after accounting standards and improvement in market efficiency. At
last, compliance of proper accounting system will lead to increasing market liquidity, high
comparability of accounting data, higher integration of financial markets, improved foreign
ownership, and increasing cross listings with FDI (Foreign Direct Investment). It is important
to know that impact of accounting system on capital markets is established which directly
considers legal systems, political systems, economic systems, board attributes, government,
level of professional data, and quality of the standards by regulating the accounting systems
(Czarnecka, 2016).

Transparency through accounting standards attract investors
The interest of complying legalisations (GAAP) describe that accounting aims to avail
investors with the related and fair data so that it can assist them to make investment decision.
This indicates that accounting data has been used in several contexts such as contract
procedures either in the firm or between the organisations, its suppliers in regards to the
capital markets, which is supposed to facilitate prediction of organisation’s future cash flows
and future returns from the securities (Simone, 2016). It has been analysed that market
reactions are induced by the accounting disclosures especially for the small organisations
because larger is the market value of the company, the smaller will be the abnormal returns at
the interim dates. Small companies have the tendency to receive less data disclosure facilities
so it receives less attention form the investment analyst (Czarnecka, 2016). On the other
hand, large companies attract greater amounts of earnings and it is in the stalk of the
government and investors whether it has been working well or not. These large amounts
directly attract investors and induce the company to become transparent in its operations. It is
seen that large information base is needed for both accounting and non-accounting
disclosures as it is related to the amount of data available to the market participants. It is
important to determine whether positive association between changes in price and the size of
unexpected earnings in the capital market (Dhar, and Wani, 2017).
Conclusion
From the above discussion, it is quite clear that IFRS and accomplishment of accounting
standard benefits users of the financial statement of company and looking to invest in the
market. As different nation have different source of information due to difference between
the statutory bodies who derives data and analyse whether all the listed companies are able to
create transparency or not. It improves the relevance of financial reporting, comparable of
accounting data and the effect of GAAP on the investment analysts. From the analytical

report and after studying which country has accomplished rules and regulations, it can be said
that there is almost similar use of accounting standards in each capital market with the strong
enforcement of minimising data differences and deciding the criteria for underinvestment for
any company. The market has reacted a lot after the disclosure of accounting policies because
weak companies were also allowed to trade in capital market and raise capital through IPO
but accounting standards and authorities have been made so that they can conduct frauds.

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