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Philip Service Corp

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Submitted By sailor8888
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a. The share price reaction to the missing inventory, writeoffs of restructuring costs and goodwill writedowns does not suggest the securities market inefficiency.
First we discuss how we define the securities market efficiency. According to the efficient-market hypothesis (EMH), the financial markets are “informationally efficient”. That is, no one can consistently achieve returns in excess of average market returns by using any information that market already knows. That means when the investment is made, the information is publicly available. One important characteristic of the efficient market is we assume the prices of securities are fully reflective of all publicly known information about the security at all time.
For Philip Service Corp. case, the head of this public company tried to artificially inflate its stock price by falsely overstating the amounts of Philip’s goodwill and inventory. The information which affected the price was the inventory and goodwill being overstated. Did this information belong to the publicly known information? The answer is no. This information was not publicly information. Then when did these problems present to the public? It was in year 1998. So we can assume this information did not present in Philip’s financial statements of year 1995 and 1996 and the first nine months of year 1997. Philip Service deliberately concealed certain information. The missing inventory, writeoffs of restructuring costs and goodwill writedowns were inside information until 1998. Market prices were certainly wrong in absence of these inside information. However, the market efficiency still applied as once the news and accurate information were publicly available, the market price quickly reflected and adjusted.
b. The way in which a firm accounts for its inventory can have a significant effect on its financial statements. The valuation of

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