Information Sets, Macroeconomic Reform, and Stock Prices

Abstract

precedented step and decided to close all financial institutions for two business days. The immediate results of the reform were a steep increase in domestic prices and a major devaluation of the Israeli pound. It should be noted that the reform provided a rare opportunity in accounting and finance research for the evaluation of the impact of a major economic event on the behavior of investors and the adjustment process they pursued. Since the reform was sudden, sweeping, and relatively isolated from other major events, it set a research environment that is not prevalent. In this study, we took advan? tage of these circumstances to examine the potential of accounting statements to serve as an information base for deriving the effects caused by the reform on specific business enterprises. Further, we assess the efficiency by which the stock market utilized this information. The paper is organized as follows. Section I describes the background of the study by identifying the main components of the economic reform and some features of the Israeli stock market. These are pertinent to the understanding of the context of the study. In Section II, we turn to the main issues addressed by this paper. These issues provide the infrastructure for the formation of spe? cific hypotheses. Section III outlines the empirical design and is followed by a description of the sample data in Section IV. In Section V we report the tests performed and their results, and Section VI is devoted to concluding remarks.