ABSTRACT
This chapter examines the evidence which indicates how decision makers react to the signals conveyed by the models. In industrial economics, academics have developed theories to explain why there are changes in market structure. The methodology for studying share price reactions to specific news is well developed. The dependent variable is essentially security returns, which can be explained in terms of a number of independent variables - generally market- and industry-wide factors and the firm-specific event or news release that is the real focus of interest. Behavioural research involving laboratory experiments has been extensively used in financial reporting and auditing contexts to study the reactions of analysts and decision makers to specific situations and news announcements. Logit models were used to assess the discriminatory power of a number of individual financial ratios. These measured various company attributes - namely profitability, liquidity, gearing, size and asset turnover.
