I have attached the homework questions and a pdf that might be needed to refer to as you answer. I have also attached the marking criteria for this homework.
T1_2021 3101AFE Accounting Theory Workshop 4 Capital Markets Research ___________________________________________________________________________ PART A: GENERAL QUESTIONS QUESTION 1: What assumptions about market efficiency are typically adopted in capital markets research? What do we mean by ‘market efficiency’? QUESTION 2: If individuals have access to insider information and are able to make large gains on a securities market as a result of using information that is not widely known, then is this an indication that the market is inefficient? QUESTION 3: Refer to Accounting Headline 10.3 (in your textbook) and explain why investors might have reacted to the false rumour. Is the reaction of investors to this false rumour consistent with the view that the capital market is efficient or inefficient? QUESTION 4: Read Accounting Headline 10.9 (in your textbook) and then consider why we might expect, or not expect, the market to react to radio announcements made by Alan Jones. Would a market reaction imply anything about the efficiency of the capital market? PART B: ANALYSIS QUESTIONS QUESTION 5: Word limit: Between 200 and 500 words. This word limit applies to this question as a whole and not to the individual components of the question. Refer to the article “The role of social media in the capital market: Evidence from consumer product recalls” by Lee, Hutton & Shu (2015), and answer the questions that follow: a) According to the authors, how do firms use different forms of social media to manage the flow of information surrounding product recalls? b) What do the results of this study suggest about the effect of social media on capital markets? In your answer you should discuss how this relates to the efficient market hypothesis and how it ties into what you have learned in the Capital Markets Research module. 2 T 1 _202 1 1 3101AFE Accounting Theory Workshop 4 C apital Markets Research ___________________________________________________________________________ PART A: GENERAL QUESTIONS QUESTION 1: What assumptions about market efficiency are typically adopted in capital markets research? What do we mean by ‘market efficiency’? QUESTION 2: If individuals have access to insider information and are able to make large gains on a securities market as a result of using information that is not widely known, then is this an indication that the market is inefficient? QUESTION 3: Refer to Accounting Headline 10.3 (in your textbook) and explain why investors might have reacted to the false rumour. Is the reaction of investors to this false rumour consistent with the view that the capital market is efficient or inefficient ? QUESTION 4: Read Accounting Headline 10.9 (in your textbook) and then consider why we might ex pect, or not expect, the market to react to radio announcements made by Alan Jones. Would a market reaction imply anything about the efficiency of the capital market? PART B: ANALYSIS QUESTIONS QUESTION 5: Word limit: Between 200 and 500 words. This word limit applies to this question as a whole and not to the individual components of the question. T1_2021 1 3101AFE Accounting Theory Workshop 4 Capital Markets Research ___________________________________________________________________________ PART A: GENERAL QUESTIONS QUESTION 1: What assumptions about market efficiency are typically adopted in capital markets research? What do we mean by ‘market efficiency’? QUESTION 2: If individuals have access to insider information and are able to make large gains on a securities market as a result of using information that is not widely known, then is this an indication that the market is inefficient? QUESTION 3: Refer to Accounting Headline 10.3 (in your textbook) and explain why investors might have reacted to the false rumour. Is the reaction of investors to this false rumour consistent with the view that the capital market is efficient or inefficient? QUESTION 4: Read Accounting Headline 10.9 (in your textbook) and then consider why we might expect, or not expect, the market to react to radio announcements made by Alan Jones. Would a market reaction imply anything about the efficiency of the capital market? PART B: ANALYSIS QUESTIONS QUESTION 5: Word limit: Between 200 and 500 words. This word limit applies to this question as a whole and not to the individual components of the question. DOI: 10.1111/1475-679X.12074 Journal of Accounting Research Vol. 53 No. 2 May 2015 Printed in U.S.A. The Role of Social Media in the Capital Market: Evidence from Consumer Product Recalls L I A N F E N L E E ,∗ A M Y P. H U T T O N ,∗ A N D S U S A N S H U∗ Received 6 January 2014; accepted 19 January 2015 ABSTRACT We examine how corporate social media affects the capital market conse- quences of firms’ disclosure in the context of consumer product recalls. Prod- uct recalls constitute a “product crisis” exposing the firm to reputational dam- age, loss of future sales, and legal liability. During such a crisis it is crucial for the firm to quickly and directly communicate its intended message to a wide network of stakeholders, which, in turn, renders corporate social media a potentially useful channel of disclosure. While we document that corporate social media, on average, attenuates the negative price reaction to recall an- nouncements, the attenuation benefits of corporate social media vary with the level of control the firm has over its social media content. In particular, with the arrival of Facebook and Twitter, firms relinquished complete control over their social media content, and the attenuation benefits of corporate social media, while still significant, lessened. Detailed Twitter analysis con- firms that the moderating effect of social media varies with the level of firm ∗Carroll School of Management, Boston College. Accepted by Philip Berger. We are grateful to the editor and an anonymous referee for their helpful comments and suggestions. We thank workshop participants at the 2014 Jour- nal of Accounting Research conference, 2014 AAA Annual meeting, Boston College, Boston University, Stanford University, and University of Illinois – Chicago accounting research con- ference and Beth Blankespoor, Jerry Kane, Paul Ma, Sam Ramsbotham, Sugata Roychowd- hury, and Nemit Shroff for useful comments and suggestions. We also thank Andrew Bronzo, John DeLorenzo, Mollie Dillon, Daniel Kim, Sungwon Kim, Xiaohui Luo, and Jiada Tu, for their excellent research assistance. An online appendix to this paper can be downloaded at http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements. 367 Copyright C©, University of Chicago on behalf of the Accounting Research Center, 2015 368 L. F. LEE, A. P. HUTTON, AND S. SHU involvement and with the amount of control exerted by other users: the neg- ative price reaction to a recall is attenuated by the frequency of tweets by the firm, while exacerbated by the frequency of tweets by other users. JEL codes: G14; M15; M40; M41 Keywords: social media; disclosure; product recalls; Twitter 1. Introduction In the past decade, information technology has changed the disclosure landscape and the way firms communicate important information to stake- holders. Both regulators and companies are starting to embrace social me- dia as a viable disclosure channel for important information. In April 2013, the SEC announced that companies may use social media outlets to an- nounce key information in compliance with Regulation Fair Disclosure.1 Despite the increasing attention from regulators and companies, there is limited evidence on the consequences of corporate use of social media and even less on the differential impact of various social media platforms.2 In this study, we attempt to shed light on these issues. Compared to traditional disclosure channels, social media allows a firm to directly and quickly reach a large network of stakeholders with its in- tended message. To illustrate, followers of a firm’s social media account(s) get instant notifications of corporate news; they can share the news imme- diately with their friends and followers, cascading into widespread reach of the firm’s intended message. Through the use of corporate social me- dia, the firm can bypasses information intermediaries and disseminate its intended message, unfiltered by traditional media, to a large network of users. In addition, social media outlets such as Facebook and Twitter facil- itate multi-directional interactions that allow users to have an online “con- versation” with the firm and with other users, which changes the dynamics and nature of the corporate disclosure.3 With an interest in exploring the power of social media in the context of corporate disclosure, we focus on product recalls under the 1972 Con- sumer Product Safety Act (CPSA). A product recall constitutes a “crisis” in the firm’s product market. As is the case with most corporate crises, 1 See http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171513574. Net- flix announced soon after the SEC announcement that it may use social media channels such as Twitter, Facebook, and its own corporate blogs as outlets for disclosing material information (Bensinger [2013]). 2 A noteworthy exception is Blankespoor, Miller, and White [2014], who document that tech firms using Twitter to disseminate links to firm-initiated press releases experience lower information asymmetry. 3 Sophisticated investors have caught on to the wealth of information on social media. Anec- dotal evidence suggests that hedge funds are beginning to track and dissect social media con- tent to gain insights into investor and consumer sentiment, aided by social media aggregator services such as Gnip (see Light [2012] and Conway [2012]). THE ROLE OF SOCIAL MEDIA IN THE CAPITAL MARKET 369 the primary goal of a recalling firm is to contain the harm and limit and repair damage to the firm’s reputation. Social media is likely to be a use- ful disclosure channel within the crisis context. As previously mentioned, a firm’s social media platform (hereafter referred to as corporate social me- dia) facilitates quick, direct broadcasting of the firm’s intended message to a broad base of stakeholders. Timely disclosure of the recall to a large network of users is an effective way to contain the damage. It gets more consumers to stop using the potentially hazardous product sooner, thereby reducing the number of incidents, which in turn minimizes the negative publicity surrounding the recall as well as the associated legal liability. In addition, firms can use their social media posts to augment the disclo- sure content provided in the official Consumer Product Safety Commission (CPSC) recall announcements with additional clarifications, reassurances, and planned course of actions. A product recall increases uncertainty about the firm and its products, and leads to a greater demand for information from customers and investors alike. Social media use enables the firm to quickly fill the information