Accounting Disclosure and Market Reaction: A Case Study of Tesco PLC

This report examines the market reaction to Tesco PLC's announcement of a new CEO, Dave Lewis, following a period of declining profits. Part 1 discusses how accounting disclosures affect the capital market's perception of the firm, exploring the value-relevance and information content of these disclosures. It analyzes various sources of disclosures and factors influencing market reactions. Part 2 provides evidence of the market's reaction to the CEO appointment announcement by analyzing Tesco's share price and comparing it to the FTSE 100 index in a three-day window around the announcement date. The report uses tabular and graphical representations to illustrate the changes in share price and trading volume, offering insights into investor behavior and market dynamics during this period. Desklib provides a platform for students to access this and similar solved assignments for academic support.

Running head: MARKET BASED ACCOUNTING
Market Based Accounting
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1MARKET BASED ACCOUNTING
Table of Contents
Part 1:.........................................................................................................................................2
Accounting disclosure effecting the capital market perception of the firm:..............................2
Introduction:...............................................................................................................................2
Market response to Accounting Disclosure:..............................................................................2
The information content of specific accounting data:................................................................4
Conclusion:................................................................................................................................6
Part 2:.........................................................................................................................................7
Market reaction to the announcement of appointment of new CEO:.........................................7
Reasons behind investors reactions:...........................................................................................9
References................................................................................................................................12

2MARKET BASED ACCOUNTING
Part 1:
Accounting disclosure effecting the capital market perception of the firm:
Introduction:
Accounting disclosure is related with the revealing the information to the capital
market. Accounting disclosure is not concerned with discovering the information by the firm.
Disclosure assumes that the information is before-hand known to the entity disclosing
information (Miller and Skinner 2015). Accounting disclosure is related to external parties
and the disclosure is regarding the company’s economic transactions and information about
the cash flows which is already held by the firm’s managers.
Given the problems of asymmetry of information, there has been growing number of
calls for firms to improve the accounting disclosure of intellectual capital as it helps in
improving the market understanding of the company’s value creation procedure and
facilitating the more precise firm’s valuation. The relationship amid the accounting
information and the capital markets has long been the matter of extensive study. The purpose
of this study is to examine how the accounting information affects the capital market.
Market response to Accounting Disclosure:
According to Park, Chae and Cho (2017) the relationship among the accounting
information and capital market has engrossed substantial amount of attention to an extent that
is possibly very highly prevalent issues in the work of accounting. The importance in this
matter is genuine, assumed that the normally recognized accounting report are directed at
offering the stakeholders with the appropriate information for making decisions related to
shares. Even though the information of accounting is used in numerous context such as
process of contracting inside the company or amid the firms and its creditors and contractors

3MARKET BASED ACCOUNTING
relating to the capital markets, such information are hypothetical to ease the forecast of the
company’s future cash flows. They are also assigned to assist the investors in assessing the
future securities risk and return.
The main purpose of researching on the capital market is to evaluate whether the
bookkeeping data that is provided is value relevant statistics to the investors and incremental
to all the other source of information that is available in public (Qiu, Shaukat and Tharyan
2016). The information containing the accounting number is concluded from the variations in
the level or otherwise the inconsistency of the stock prices and inferred from the variations in
the level or in the inconsistency of the stock values and from the alterations in the shares that
is traded over the period of short time in which the data is released in public. If the capital
market is efficient, share prices should reflect the complete and newly released information
(Li 2015). As a result, variation in the share prices or alterations in the security traded is
anticipated during the publication phase given that the released numbers deliver new info to
the participants in the market regarding the sum or improbability of projected future cash
flows. The informative content of earning is concluded from the abnormal mean returns or
from the variations in the size of trading over the short period of announcing data.
Since the sum of incomes is futile, such amount should be contrasted with the market
anticipations regarding the incomes. Under the hypothesis information-subject, positive
unanticipated earnings may on average result in positive irregular returns and negative
unanticipated incomes with positive unanticipated earnings (Harrison and Smith 2015). It
also reveals statistically negative for firms that have unanticipated earnings.
As the accounting figures are reported by firms all through the year Christensen, Hail
and Leuz (2016) proposed to conduct an examination of the incremental data content of
bookkeeping proceedings for better understanding of how the shareholders route the

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accounting information. Study conducted on 120 randomly chosen UK companies shows that
both the introductory and provisional announcement have the highest number of information
content. The accounting disclosure of firms unveils noteworthy content of information. In
contrast to this, the price effect of the annual general meetings appears to the insignificant.
The correlation tests reveal that abnormal returns related with the introductory earnings
pronouncement were related positively to the abnormal return both at the provisional
disclosure and firms annual accounting disclosure dates. This provides a suggestion that firms
which unveil higher preliminary informative announcement also tends to possess highly
informative accounting reports and interim accounting disclosure.
The information content of specific accounting data:
According to the investigation conducted by Macve (2015) info content of present
cost information disclosed by numerous businesses listed on the London Stock Exchange
shows that such information has small but real effect on the stock returns. As the market
reaction to the accounting disclosure varies among the firms, several studies have assessed
the possibilities of determinants of such differences. Results of the studies shows that
volatility in returns or the abnormal mean return is positively associated with the size of
unanticipated yearly or interim earnings.
Researchers such as Maynard (2017) theorize that companies select the accounting
programs or take into the consideration the flexible accruals in accounting to reveal the
secluded information of the management regarding the forthcoming prospects. If it is found
that the discretionary accruals are actually informative then the irregular stocks return around
the financial statements release must be associated to the sign and amount of earnings that
originates through manipulations.

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The efficient market hypothesis explains that the share prices must react promptly and
totally to any form of value-relevant information and the subsequent changes in price must
not be associated to such reactions (Martin and Roychowdhury 2015). In contrary to such
hypothesis, numerous empirical studies have represented that stock price reactions on the
incomes publication date is unfinished, this is because prices adjust progressively to the new
info. As the abnormal returns have the identical sign as the unanticipated earnings, investors
appear to underact to the information that is contained in the earnings.
The different event studies have concentrated on the reaction of market to the
accounting disclosure in short time period, the associated studies assess the connection amid
the stock returns and bookkeeping disclosure over the long period (Hoitash, Hoitash and
Yezegel 2017). While the previous studies have examined accounting data role in offering
incremental info which may create an impact on the perception of investors over the
forthcoming prospects of the firm, the latter offer the evidence regarding the part of these
information in the form of summary of the events that have impacted firms throughout the
reporting period.
In opposed to the studies related to market reaction, related studies do not provide any
casual association among the secretarial facts and stock values. They hardly assume that the
participants in the market make the use of accounting information in their course of valuation
(Macve 2015). They only theorize that if the accounting information provides the measures of
worthy summary of occasions combined in the price of shares, they are value relevant since
their usage might provide the firm with value which is near the market value.
According to Maynard (2017) differences in conservative earnings amid the two
groups is largely associated to the circumstance that managers that are more risk opposed,
expect the recognition of bad news while the co-efficient of good news are significant for the

6MARKET BASED ACCOUNTING
risk averse managers. Whereas the bad news is more significant for the risk opposed group
only. The lower association among the earnings and the returns which is undesirable earnings
are not considered as value relevant as losses are anticipated to preserve indefinitely.
Preceding from the above explanation the strength of relationship amid the earnings
and returns can be regarded as the measure of the value-relevant of accounting information or
disclosure. Hypothesizing, that greater is the value relevance the better are accounting
figures.
Conclusion:
The empirical evidences are associated largely with the informational perspective of
accounting figures which states that the accounting disclosure by firms are relevant for the
purpose of valuation given the information reflects the influence on the stock prices of offer
the incremental information that impact the perceptions of investors on firms. Overall, the
study intended to explain how the accounting numbers and stocks returns are related to each
other.

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Part 2:
Market reaction to the announcement of appointment of new CEO:
Tesco PLC, through majority of its subsidiaries functions as the food general
merchandise retailer. Tesco plc has announced that Dave Lewis would join the board of
Tesco on 1st October as the chief executive officer by succeeding the Philip Clarke. Tesco
was regarded as successful and continued its expansion till 2013 when the company faced
major drop in the profit and also reported a worst performance (Wood, Wrigley and Coe
2016). Because of the poor performance in July 10, 2014 Tesco announced the appointment
of new CEO. The primary purpose of this study is to examine the reaction of market on the
price of share originating from the announcement of new CEO. The report would also assess
the three windows period before, on and following the date of announcement.
The market reaction following the announcement of the new CEO of Tesco Plc has
resulted in some changes in the price of shares (Tesco plc 2018). The below stated table 1 and
table 2 reflects the changes in the market price as well as volume of trade for the Tesco prior
to the date of announcement, on the day of announcement and day following the
announcement. Table 1 represents the different share price of Tesco Plc with data derived
from yahoo finance to serve as the data for the understanding the event.
Date Open High Low Close Volume Adj Close
22-07-2014 285 285.63 276.67 277.35 34084400 275.49
21-07-2014 294.1 295.2 284.81 288.65 49954000 286.73
18-07-2014 284 285.55 281.8 285 15394100 283.09
Tesco Plc
Table 1: Table reflecting three-day Share Price of Tesco Plc
(Source: Uk.finance.yahoo.com 2018)

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Date Open High Low Close Volume Adj Close
22-07-2014 6728.44 6801.84 6728.44 6795.34 0 6795.34
21-07-2014 6749.45 6753.42 6715.78 6728.44 0 6728.44
18-07-2014 6728.32 6749.89 6690.9 6749.45 0 6749.45
FTSE 100
Table 2: Table reflecting three-day share price of FTSE 100
(Source: Uk.finance.yahoo.com 2018)
1 2 3
-0.02
-0.01
0
0.01
0.02
0.03
0.04
0.05
0%
4%
-1%
Share Price Movement- Tesco PLC vs.
FTSE 100
Tesco Plc Close %change FTSE 100 Close %change
Figure 1: Figure representing share price movement of Tesco
(Source: As Created by Author)
As evident from the above stated table before the announcement the share price of
Tesco PLC stood £285.0 with the volume of trade standing 15,394,100 however the price
slightly increased by 1.91% on the day when the announcement was made
(Wealthandfinance-news.com 2018). This led the share price to become £288.65 with volume
of trade standing £49,954,000. Consequently, the share price declined by 2.37% in the next
day when the announcement was made for the appointment of new CEO as the share price
stood £277.35 and the volume of trade standing 34,084,400.

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In comparison to the Tesco overall changes in the market price of FTSE 100 the study
provides that there was the slight difference. This is because the FTSE 100 market price prior
to the day of announcement stood £6,749.45 then it slightly fell to 0.31% (Turker 2018).
Unlike the share price of Tesco that went up on that particular day, making the FTSE price to
fall by £6,728.44 on the date of announcement. However, the price increased to £6,795.34
representing a rise of 0.99% rise in the market price while the share price of Tesco fell by
2.37% on the same day.
The appointment of new investors may enable the investors to think that the company
is having the problem in future and they may react in both positive or negative way. The
market reactions have significant effect on the outcome of the announcement of new CEO for
Tesco Plc (Haddock-Millar and Rigby 2015). The announcement relating to the appointment
of new CEO was embraced by the investors in a positive manner. The investors assumed that
it would reflect an anticipation in their future cash flow and there was positive response in the
share price on the day of announcement which was oboe the share price prior to the
announcement day. The market reactions also included that the new leadership would help in
stabilizing the organizations poor corporate governance in future and would bring a better
name to the company which may interest additional investors.
Reasons behind investors reactions:
The market price of the company refers to the economic price where goods and
services is provided in the market place. The market price and the market value remains equal
under the conditions of market efficiency and rational expectations. However, Mason and
Evans (2015) pointed out that determination of market price comprises of market mix
strategy and decisions related to demand. It also includes the costs and other environmental
factors namely the economy, considerations resellers and the government. Ismail, (2017)
additionally added certain internal factors that creates the market price of Tesco.

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There are internal factors that create an effect on the market price of the company and
these includes the quality of the product, leadership, quality of performance and research and
development. There are some of the important economic or regulatory factors that resulted in
possible reaction to the market which included inflation, demand and cost price (Tesco 2014).
Tesco being the grocery company faced numerous challenges that provided the rival with the
opportunity to take majority of the Tesco’s investors in the year 2014. Gauging into the
annual report of Tesco 2014 there were numerous corporate governance changes that ranged
from non-payment of the due amount of executive remuneration to failure in the board in
meeting target. Hence, this resulted the investors to react negatively towards the market price
of Tesco.
Turker (2018) explained the factors that was related to the disclosure of information
by the analyst in two ways namely positive correlation and negative correlation. Positive
correlation included those factors that caused market reactions due to higher volatile returns
and uncertain cash flow security. Negative correlation included a possible failure of the
company.
The stakeholders and the investors may possibly consider the appointment of CEO as
capable of producing future success. According to Mason and Evans (2015) findings it is
noticed that the press release played the vital role for the stock market since the investors
reacted positively to the media information. The disclosure of media enables the investors to
react upon the market conditions whether there is a good or bad news. According to findings
of Kukreja and Gupta (2016) it is found that investors react to the non-routine turnovers upon
the appointment of the successors from outside the firm as the new CEO of the company.
The CEO is the person that holds the vital position in the company. The CEO designs
the strategy of the company to compete with the other competing firms in the financial

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market. The poor performance of the CEO is directly related to the share price of the
company and reaction of the investors also create an impact on the company. Similarly,
gauging into the financial report of Tesco it is found that no remuneration has been provided
to the directors since the company has failed to meet the target and there were several
changes in the corporate governance and performance of the company (Turker 2018). This
included the resignation of some of the key officer signalling the problem in the company
which may cause market reaction. The market reaction originating from the announcement of
the Tesco’s new CEO has introduced some changes in the share price.
The appointment of the new CEO would bring Tesco with new international
consumer experience and knowledge in change management, brand administration, business
administration and strategy. The appointment of the new CEO would bring in fresh
perspective to the company as well as new profile. The leadership of new CEO would help
the company in sustaining and improving the company’s top most spot in the retail market.