Reference no: EM132489836

Question 1 - Ball and Brown's research examined the association between stock returns and earnings when the period (or window) over which earnings and stock returns are measured is one year. In later periods, researchers examined the association between stock returns and earnings when the period (or window) over which earnings and stock returns are measured is greater than one year.

Part A - Discuss how the strength of the association between earnings and stock returns changes as the window increases from one year to greater than one year.

Part B - Identify and explain four reasons why share prices of different firms might react differently to earnings announcements even when these firms report the same amount of unexpected earnings.

Question 2 - Arrow Inc. has been using straight-line amortization for its capital assets for many years. Management is considering a change to accelerated amortization but has concerns that this accelerated approach may cause confusion among some investors concerning the potential effects of the change on share prices.

Part A - Identify and explain the three conditions under which the change from straight-line amortization to accelerated amortization for capital assets will not have an impact on Arrow's share price.

Part B - If Arrow is operating in an efficient market, explain whether it needs to present its financial information in a manner that everyone can understand. Discuss two reasons.