University Research: Capital Market Reaction to Financial Reporting

This research proposal delves into the intricate relationship between a company's financial reporting and the capital market's reaction. It examines how adherence to international financial reporting standards (IFRS) and changes in company earnings influence share prices and overall market value. The study investigates the correlation between annual report disclosures, market liquidity, and the cost of capital, while also exploring the impact of earning on the capital market. By analyzing factors such as return on investment (ROI), cash flow, and company earnings, the research aims to identify the problems and uncertainties arising from less effective reporting compliance, and their effect on the capital market. The research also highlights the importance of legal reporting compliance and its influence on investor decisions and market stability, ultimately providing insights into how companies can improve their financial reporting practices to foster investor trust and mitigate market fluctuations.

RUNNING HEAD: Research on accounting issues
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Name of the Student-
Title-Research proposal (Reaction of capital market to financial reporting)
University Name-

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Abstract
This research has shown the details study on the reaction of capital market on the
financial statement of company. In this research, study has been conducted on how the share
price of companies around the globe has destructed their values due to the less effective
compliance with International financial reporting standards in their reporting frameworks and
changes in earning of company. This paper investigates the relations between annual report
disclosure, market liquidity, capital cost in the market and fluctuation of capital market on the
reporting frameworks of organization. This research has identified the problems and uncertainty
of changes in share price of company in capital market which arise due to less effective reporting
compliance program.

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Table of Contents
Abstract.......................................................................................................................................................2
Introduction.................................................................................................................................................4
Research question...................................................................................................................................4
Key issues................................................................................................................................................4
Impact of earning on the capital market reaction...................................................................................5
Capital market reaction due to the changes in earning given by large companies......................................7
Use of financial information such as ROI, Cash inflow and earning of companies in market by the
investors before making investment in capital market...............................................................................8
Legal reporting compliance and its impact on the capital market...............................................................9
Limitation of research on impact of earning and its impact on the capital market...................................10
Conclusion.................................................................................................................................................11
Finding of this research.............................................................................................................................11
References.................................................................................................................................................13

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Introduction
In this report, it is given that reporting frameworks of organization are depends upon the
accounting standards and reporting framework of organization. Capital market fluctuation is
highly dependent upon the disclosure of information of companies whose shares are listed in
stock exchange. This research contains the information related to impact of earning to the
reaction of capital market. With the increasing ramified economic changes, capital market is
depended upon the various macro and micro factors such as economic policies, investor’s
budget, foreign direct investment and company’s financial reporting frameworks. However, in
order to win over the investors trust in capital market, many big listed companies are following
international financial reporting standards in determined approach. This research has also
reflected the key understanding on the factors affecting the fluctuation of capital market and its
relation with the earning of companies
Research question
 What is the impact of earning on the capital market reaction?
Key issues
There are several issues and factors that have bearing on the capital market reactions due
to the changes in earning. However, due to the uncertainty of market factors and capital market
reactions, various investors have to face high amount of loss in their capital when they invest
their money in capital market. The main problem in this research is to quantify the impact of
earning on the capital market reaction (Grewal, Riedl, and Serafeim, 2015).

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Impact of earning on the capital market reaction
Capital market could be defined as a part of a financial system that concerned with the
raising capital by shares, bonds, debentures and other financial instruments. Ideally, this market
could be defined as place where investors invest their money to create value on their investment
and organizations raise money for their business functioning. With the ramified changes and
economic growth, capital market is bifurcated into two parts such as primary and secondary
market (Griffin and Sun, 2013). Primary market is accompanied with the issues of initial public
offers and further public offers which is accepted by investors by filling the application forms in
the market. On the other side, in secondary market, investors indulged in consistent trading
related to buy and sell their financial instruments with a view to create value on their investment.
After collecting data from the various sources, it is determined that if listed company could make
proper disclosure through their reporting frameworks then it capital market would be less
unstable and accompanied by less risk (Clinton, Pinello, and Skaife, 2014) It is considered that
company having higher earnings will be more open in the market trading and investors would be
ready to buy these stocks to create value on their investment.
Practical implication of listed company’s earning and its impact on the capital
market
Capital market is used by listed companies to raise capital from the market and by
investors to create value on their investment. Fluctuation of share prices and value of the issued
capital depends upon information of the company disclosed in the market. Capital market would
be more unstable if company fails to disclose its earning in market. For instance, if some
investors have idea about the company’s business functioning and gathered undisclosed
information from unethical means then in that case trading of those shares would be highly

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unstable (Hostak, et al, 2013). In case of Sun Pharm and Ranbaxy case, market was highly
fluctuated and resulted loss and profit to investors in the trading of both shares. Ideally, listed
stock exchange bane the trading of shares of particular company in case of disclosure made or
when they company entered into strategic transactions with a view to save the investors from
high loss. This reflects that if disclosure made by company is related to expansion, strategic
alliance or plugging back the money in their value chain activities then share prices of the
companies will increase so will market capitalization (Hostak, et al. 2013). On the other hand, if
disclosure of information is not irrelevant or reflects downward slope of business then share
price or market capitalization will be down and investors will have to face loss in their
investment value. In simple word, it could be inferred that earning capacity of company has
great impact on the investor’s investment decisions (Brochet, Naranjo, and Yu, 2016). For
instance, if in the financial reporting of five companies named GE capital, Woolworth,
Wesfarmers and Tesco, it is observed that Woolworth and Tesco had complied with international
and domestic financial reporting standard and also reflected high amount of increment in their
total turnover and earning capacity as compared to other companies. In that case, investors would
be more inclined towards investment of their capital only in Wesfarmers and Tesco Company
(Kim, et al. 2013). This has shown that financial information or earning capacity of companies
in the market put high impact on the investment decisions of investors. Nonetheless, there are
several cases in which investors enter into insider trading investment process. This is the
unethical business strategy of investors in which they use undisclosed financial information. This
information is grasped by investors from the unethical means (Pevzner, Xie and Xin, 2015). In
that case, capital market consisted with primary and secondary market will be highly fluctuated
and investors who possess this undisclosed information would be able to drive high amount of

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profit from their investment process. In addition to this, market capitalization will also be high in
case of unstable capital market. Investors in the unstable capital market are tending to more
active in their investment activities with a view to save themselves from the possible investment
losses. Therefore, conclusion about the capital reaction to the reporting frameworks could be
defined on the basis of evidence of from the large number of companies whose shares are listed
on stock exchange. Capital market reaction to the financial reporting relies on the underlying
assumption that equity market are more efficient than other instruments such as bonds,
debentures and gilt securities (Mishra, Moriyama and N'Diaye, 2014).
Capital market reaction due to the changes in earning given by large
companies
It is evaluated that if companies are proving more return on their shares to investors on
the basis of amount of income earned by these companies. In this case, capital market will
reflects high return on capital invested by the investors to their shareholders. However, if the
financial statements of companies are reflecting that company has earned high amount of profit
in particular years then investors will be more inclined towards investing their money in that
particular companies (Bischof, Brüggemann, and Daske, 2014). It has shown that investors are
vigilant and they make their investment in capital market on the basis of information disclosed
by companies in their annual report. Nonetheless, investors who invest their money in capital
market firstly evaluate company’s business performance trend after evaluating financial
statements and analyzing these details. These accounting and financial information reflects the
trend of company and their earning capacity. It is observed that if return on capital employed by
company is high then value of shares in market would also increase and vice-versa (Chen, et al.
2016).

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Use of financial information such as ROI, Cash inflow and earning of
companies in market by the investors before making investment in
capital market
Throughout the time, financial analysis tools are gaining momentum and investors are more
inclined towards using these tools before investing their capital in market. It has been observed
that ratio analysis, cash flow statement analysis and vertical analysis are the key tools which
could be used by investors before investing their money in capital market (Barth, 2013). For
instance E capital, Woolworth, Wesfarmers and Tesco are the following listed companies which
has shown the proper compliance reporting program. Investors after analyzing the financial
statements and their documents could analysis whether they should invest their money in their
capital or not. After analyzing the financial statements of GE capital, it is inferred that company
has increased its overall turnover by average 28% since last five years. This level of changes in
the financial statement of GE capital has shown that investors by investing their money in GE
capital could create value on their capital (Schmid and Dauth, 2014). This financial statement
and disclosed information reflects that if investors would invest their money in GE capital then
they could easily create value and earn at least 28% return from their investment. This level of
information will attract more investors to invest their money in organization. In addition to this,
consistent increase in buying shares of GE capital will increase the overall market capitalization
of shares of GE capital. Capital market has become a place where investors invest their money to
create value and big companies raise funds from the market. However, investors use critical
analysis technique before investing their money in particular shares (Palea, 2013). If company
has disclosed in its financial statement or annual report that company has high amount of earning
and expanding its business by investing or plugging back more money in its business then all the
investors would invest their capital in that company (Johnston, and Petacchi, 2017). This reflects

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that investment decisions of investors highly dependent upon the financial reporting of
companies on domestic and international level. Share price of company in capital market is
depended upon the several factors such as disclosed information of the relevant company, return
on earning and strategic planning implemented by organization. In addition to this, brand image
of company also put positive impact on the value of shares traded in the capital market.
However, as per the listing rules and regulation, it is observed that if company fails to file their
annual reporting then after certain period trading of share of that company will be barred from
the capital market. For instance, Trading of Larsen and Turbo banned due to the wrong financial
reporting and disclosure of wrong information to shareholders (Crawford, Lont, and Scott, 2014).
Legal reporting compliance and its impact on the capital market
As per the perception of Cline, Garner, and Yore, 2014 it is reflected that Each and every
listed company needs to comply with the listing requirements and regulations. It is observed that
listed company should establish proper level of harmonization in its domestic and international
reporting frameworks with a view to attract more international clients. It is considered that
investors are attracted towards investing in the share capital of companies that are listed on the
international stock exchange. However, if listed companies fail to comply with the listing and
reporting laws and regulations then investors would not invest their capital in their share capital.
Failure of listed companies to comply with the listing rules and reporting standards will result to
decrease in overall market capitalization (Thompson, 2013).

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Limitation of research on impact of earning and its impact on the capital
market
This research has been prepared on the basis of data collected from the secondary
sources. In order to conduct this research, annual report, financial statements and other
documents of various listed companies have been analyzed. However, clear nexus has been
established in the market capitalization and disclosure of information by the listed companies.
Nonetheless, all the information collected is limited to some articles, news and shared
information of stock exchange (Aobdia, Lin and Petacchi, 2015). Another limitation of this
research is related to the core understanding on the impact of earning to the capital market
reaction (Atkins and Maroun, 2015). However, due to the other uncertain factors, capital market
reflects stable reaction for the some companies even if they are not making proper level of
reporting compliance. The methodologies used to collect the data from the market are secondary
sources which could be wrong and unfaithful on the basis of some contingent factors. It is
determined that to the safer side, reader should also evaluate other articles and books before
determining any investment decisions after reading this research on reporting compliance and its
impact on the capital market. Accounting theories and practice should contain the international
standard and reporting rules. If company fails to comply with these rules and standards then it
would put negative impact on capital market and result to high fluctuation of capital market on
domestic and international level (Felman, et al. 2014).

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Conclusion
Capital market could be defined as place where investors invest their money to create
value on their investment and organizations raise money for their business functioning. This
capital market assists both investors and organizations to fulfill their needs and wants in
determined approach. There are several investors who have affected due to the wrong
information disclosure by the listed companies in the market. The main impact of wrong
information disclosure and non-effective reporting frameworks of listed companies could be seen
by analyzing the ups and down of capital market. If capital market is accompanied by the cheat
place such as insider trading, wrong information disclosure and non-effective reporting
frameworks of listed companies then investors would have to face high amount of capital
investment risk and unstable capital market fluctuation. Now in the end it could be inferred that,
capital market is subject to market risk and investors could analyze the company’s annual report
and financial statement only when listed companies have followed proper level of reporting
compliance program.
Finding of this research
This research has shown nexus between capital market reaction and earning of listed
companies. It has found that investors are more inclined towards investing their money in the
share capital of company that have shown high amount of earning and less fluctuation in their
share price. Earning of company is not limited to the performance of company but also reflects
the fair views of company’s assets. After evaluating all the internal and external factors of
reaction of capital market due to impact of earning of company, it is inferred that investors
should implement proper level of trend analysis for their investment decision It could be inferred

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that stock exchange should strengthen the listing rules and regulations for better handling market
capitalization and stock trading of companies for identifying their earing. Nonetheless, stock
exchange and accounting and reporting authority should strengthen the listing and reporting rules
and regulation to curb the fluctuation of capital market in determined approach (Drake,
Roulstone, and Thornock, 2015).

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References
Aobdia, D., Lin, C.J. and Petacchi, R., 2015. Capital market consequences of audit partner
quality. The Accounting Review, 90(6), pp.2143-2176.
Atkins, J. and Maroun, W., 2015. Integrated reporting in South Africa in 2012: Perspectives from
South African institutional investors. Meditari Accountancy Research, 23(2), pp.197-221.
Barth, M.E., 2013. Global comparability in financial reporting: What, why, how, and
when?. China Journal of Accounting Studies, 1(1), pp.2-12.
Bischof, J., Brüggemann, U. and Daske, H., 2014. Fair value reclassifications of financial assets
during the financial crisis.
Brochet, F., Naranjo, P. and Yu, G., 2016. The capital market consequences of language barriers
in the conference calls of non-US firms. The Accounting Review, 91(4), pp.1023-1049.
Chen, J., Cumming, D., Hou, W. and Lee, E., 2016. Does the external monitoring effect of
financial analysts deter corporate fraud in China?. Journal of Business Ethics, 134(4), pp.727-
742.
Cline, B.N., Garner, J.L. and Yore, A.S., 2014. Exploitation of the internal capital market and the
avoidance of outside monitoring. Journal of Corporate Finance, 25, pp.234-250.
Clinton, S.B., Pinello, A.S. and Skaife, H.A., 2014. The implications of ineffective internal
control and SOX 404 reporting for financial analysts. Journal of Accounting and Public
Policy, 33(4), pp.303-327.

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Crawford, L., Lont, D. and Scott, T., 2014. The effect of more rules‐based guidance on expense
disclosure under International Financial Reporting Standards. Accounting & Finance, 54(4),
pp.1093-1124.
Drake, M.S., Roulstone, D.T. and Thornock, J.R., 2015. The determinants and consequences of
information acquisition via EDGAR. Contemporary Accounting Research, 32(3), pp.1128-1161.
Felman, J., Gray, S., Goswami, M., Jobst, A.A., Pradhan, M., Peiris, S. and Seneviratne, D.,
2014. ASEAN‐5 bond market development: Where does it stand? Where is it going?. Asian‐
Pacific Economic Literature, 28(1), pp.60-75.
Grewal, J., Riedl, E.J. and Serafeim, G., 2015. Market Reaction to Mandatory Nonfinancial
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Griffin, P.A. and Sun, Y., 2013. Going green: Market reaction to CSRwire news
releases. Journal of Accounting and Public Policy, 32(2), pp.93-113.
Hostak, P., Lys, T., Yang, Y.G. and Carr, E., 2013. An examination of the impact of the
Sarbanes–Oxley Act on the attractiveness of US capital markets for foreign firms. Review of
Accounting Studies, 18(2), pp.522-559.
Hostak, P., Lys, T., Yang, Y.G. and Carr, E., 2013. An examination of the impact of the
Sarbanes–Oxley Act on the attractiveness of US capital markets for foreign firms. Review of
Accounting Studies, 18(2), pp.522-559.

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Johnston, R. and Petacchi, R., 2017. Regulatory oversight of financial reporting: Securities and
Exchange Commission comment letters. Contemporary Accounting Research, 34(2), pp.1128-
1155.
Kim, Y., Li, S., Pan, C. and Zuo, L., 2013. The role of accounting conservatism in the equity
market: Evidence from seasoned equity offerings. The Accounting Review, 88(4), pp.1327-1356.
Mishra, P., Moriyama, K. and N'Diaye, P., 2014. Impact of Fed tapering announcements on
emerging markets.
Palea, V., 2013. IAS/IFRS and financial reporting quality: lessons from the European
experience. China Journal of Accounting Research, 6(4), pp.247-263.
Pevzner, M., Xie, F. and Xin, X., 2015. When firms talk, do investors listen? The role of trust in
stock market reactions to corporate earnings announcements. Journal of Financial
Economics, 117(1), pp.190-223.
Schmid, S. and Dauth, T., 2014. Does internationalization make a difference? Stock market
reaction to announcements of international top executive appointments. Journal of World
Business, 49(1), pp.63-77.
Thompson, P.A., 2013. Invested interests? Reflexivity, representation and reporting in financial
markets. Journalism, 14(2), pp.208-227

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Appendix

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