Publication detail

On the Importance of Clean Accounting Measures for the Tests of Stock Market Efficiency

Author(s): Jiří Novák M.Sc., Ph.D., Deloitte Corporate Chair, Mattias Hamberg
Type: IES Working Papers
Year: 2007
Number: 25
ISSN / ISBN:
Published in: IES Working Paper
Publishing place: Prague
Keywords: market efficiency, investment, contrarian strategy, transitory earnings, accounting conservatism, Sweden, Scandinavia
JEL codes: G14
Suggested Citation: Hamberg, M., Novak, J. (2007) “On the Importance of Clean Accounting Measures for the Tests of Stock Market Efficiency.” IES Working Paper 25/2007, IES FSV, Charles University, Prague
Grants: IES Research Framework Institutional task (2005-2011) Integration of the Czech economy into European union and its development
Abstract: Tests of the semi-strong form of the efficient market hypothesis (EMH) typically use earnings and book value of equity as benchmarks of fundamental value. Accounting earnings, however, are contaminated by noise due to their transient component and book value of equity tends to be biased downwards due to accounting conservatism. We investigate whether controlling for these effects impacts on the implications concerning the information efficiency of the Swedish stock market. We conclude that relevant adjustments increase both the magnitude and the consistency of the value premium earned on a contrarian investment strategy that buys (shorts) stocks with low (high) relative market valuation. The existence of the value premium cannot be explained by common risk proxies or transaction costs argument. Using cleaner accounting proxies thus strengthens the evidence on the imperfect efficiency of the Swedish stock market.
Downloadable: WP 2007/25 Hamberg, Novak

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