Efficient Capital Markets and the Information Content of Accounting Numbers

The theory of efficient capital markets suggests that if the capital markets are efficient, security prices can be assumed at any time to “fully reflect†all available information. Various forms of the model have been subjected to extensive empirical testing. The results of these tests have been such that in reviewing the literature on the theory Fama [3] states, “ … the evidence in support of the efficient markets model is extensive, and (somewhat uniquely in economics) contradictory evidence is sparse.†Most of the research, however, has been addressed to the question of whether prices “fully reflect†particular subsets of available information. The validity of these results depends on the extent to which the information in the subset used for testing captures the information actually impounded in prices.