Relation between Accounting Choices, Book Values and Stock Prices

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This study examines the relationship between stock prices and accounting figures, primarily the book value of equity and earnings, as well as the market perception of accounting choices implemented bycompanies. Market event studies from late sixties have initiated numerous of researches, and the majority of contemporary results were consistent with strong belief in the market efficiency theory. Thebook value of equity and earnings have been proved to have the highest explanatory power of future stock prices. Other accounting-related issues, like inventory methods or accounting for business combination, were proven to have reliable impact on the stock prices. Moreover, the cash flow implications triggered by the accounting change are not an indispensable condition to influence the stock price level. Although a great body of research has treated the relationship between accountingchoices and stock prices, a clear-cut mechanism is not well specified. The evidence is inconsistent, and the consequences of accounting change are difficult to measure. However, the accounting figuresincluded in financial statements remain the most important measure of the companies’ performance. Due to the economic and technical progress, which considerably modified the structure of companiesand the e...