The Role of Accounting in an Efficient Market

Accounting is a process companies use to record, report and analyze financial information. This information plays an important role in the efficient market theory, which studies the response of prices when all necessary information is available in the market.

Facts

Accounting information is commonly used by external business stakeholders who make business, personal and investment decisions based on the data. The efficient market theory would be devoid of its purpose if no accounting information is available in the economic market.

Features

Companies often release an income statement, balance sheet and cash flow statement. These statements outline a company's sales revenue, cost of goods, expenses, assets, liabilities and cash flows. Gross profit, net income and economic value are important features of this information in the efficient market theory.

Function

Accounting information allows individuals to break the company down into its lowest form of efficiency based on financial operations. Competing companies can use this information to price goods and services. The ability to make decisions or accurately respond to a company's financial performance can only be done when actual accounting information is known.

References

• Accounting Coach: Accounting Basics
• Business Dictionary: Efficient Market