ACC80005 Take Home Assignment Solution

Question 1:

The efficient market theory suggests that the individual investors in market are usually well-informed and rational about their decisions. However, the rationality of investors is not real as investors tend to update their beliefs upon receiving new information that is sensitive to their investment decisions (Mian & Sankaraguruswamy, 2012). Hence, behavior of investors might affect the rationality and investment decisions in reality. The proponents of the behavioral finance consider many factors that affects the investors’ decision-making process. The biasness can arise from psychological, demographic, social and economic factors with some having major influence while others having slightly lesser effect on the investors (Muradoglu & Harvey, 2012).

Normally, the changes in the market information regarding a stock can cause over or under reaction to the price changes that can alter the decision-making behavior of the potential investors in the stock market. Usually, due to media’s reaction on some stock, the investors are found to be fully reactive giving rise to framing bias (Lawrence, 2012). Framing bias occurs when the information is presented by media in a negative manner and investors tend to react by selling the stocks as a likely loss is preferred over a certain loss in the stock market. Typically, if particular information is released in a market, and the share price changes due to that information leak, then the information is considered to be relevant and useful for making investment decisions (Shinong, 2010). 

In the given scenario, ACCC accidentally published a decision of blocking $15 billion merger between Vodafone Hutchison Australia and TPG Telecom during the trading hours of first week of May, 2019. Due to the leak of news, the TPG Telecom’s share price fell down by 13.5% while wiping out $1 billion market value of the business (Colangelo, 2019). The fall in the share price of TPG Telecom could be due to framing bias that makes the investor react to the negative situation by selling the shares immediately. The framing bias indicates lack of understanding from investors side as they tend to consider the negative media headlines while avoiding the positives of the firm that remain in place. In the given scenario, the investors became hyper-focused due to negative media release by ACCC before time that pushed the investors to react immediately while accepting short-term losses for avoiding certain long-term losses. 

According to Bondt and Thaler (1985), the investors overreact to the news and events that cause market inefficiencies in the stock market while pushing upward or downward pressure on the share prices. The reaction of investors in this particular case can also be tracked to availability bias. The availability bias stresses that investors weigh their decision heavily on the recent information. For instance, the investors of TPG reacted too quickly to the recent news leaked by ACCC which put the downward pressure on the share prices of TPG causing it to lose $11 billion. Hence, both framing and availability bias explain the decline in the share price of TPG by 13.5% caused by the ACCC media release much effectively. 

Question 2:

A normative accounting theory outlines the practice followed by firms that guide them which accounting practices ought to be carried on and what kind of information can be communicated by the financial statements (Peters & Romi, 2014). The normative accounting theory aids the firms to develop or create the financial statements in national socio-economic environment surrounding the firm. The accounting practices followed by the firm must be in harmony with the overall environment surrounding the company as stressed by Ahmad & Hossain (2015) that the companies should not harm the environment based on normative accounting notion. According to Chetkovich (1972), different environments require different accounting objectives to be fulfilled, hence the financial statements of each firm must be developed using specific accounting standards. The conceptual frameworks and accounting standards that must be accounted by different firms can be set using the normative accounting theories. 

Using normative accounting theory, it can be said that if a certain set of stakeholders of company demands the climate-related risks to be captured by the financial statements, then the company needs to follow the climate risk disclosures for fulfilling their needs. According to Graystone (2019), if the investors consider the climate-related risks to be important for making decisions, then these risks must be reflected by the financial statements of the company.