Many market participants argue that financial markets are efficient and that financial statement users cannot routinely analyze financial statements to find mispriced securities. This view would lead some to suggest that there is little value to
financial statement analysis. Required: Provide a discussion of the role of financial statement analysis in an efficient capital market and reasons why financial statement analysis is still valuable.
1 . Even if markets are perfectly efficient, someone must do the analysis to bring about appropriate prices.
2 . A finding that the market is efficient on average does not preclude temporary mispricing of securities. Financial analysis can identify specific mispriced securities.
3 . Research has shown that equity markets are not perfectly efficient, financial analysis has uncovered anomalies.
4 . Financial analysis can adjust financial statements for the biases related to managers' preference of job security and compensation.
5 . Financial analysis is valuable outside to the equity capital markets.
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