Economic Theory and Accounting Principles: A Conceptual Examination of Market Behaviour
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Abstract
The accounting principles in operationalizing economic theory to explain observed market behaviour. The study takes an interdisciplinary approach that combines conceptual analysis, descriptive and relational statistical data, and is based on firm-level accounting principles, accounting ratios, valuation metrics, and stock prices. The analysis shows that accounting information is a formal process by which economic performance, efficiency and value creating are converted into market valuation and price dynamics. Accounting measures which influence investor expectations by mitigating information asymmetry and shaping market reads of firm fundamentals can be seen as playing a less passive role as a historical record, and more as an instrument of the firm in shaping expectations towards the firm. The results indicate stable relations between accounting-based performance measures and market-based valuation measures, and consistent relations between accounting fundamentals and changes in stock price over time. These findings back the opinion that market behaviour is entrenched in accounting systems and institutional reporting provisions. Focusing on the interpretative and informational functions of accounting, the study has a contribution to the theoretical issues of market efficiency and disclosure by demonstrating in which accounting principles qualify the interaction of economic activity and capital market performance. The study is given as a unifying framework of better understanding of the accounting-economics interface and give a basis to further study on disclosure, valuation, and market dynamics.
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