A Historical Look at U.S. GAAP Essay Example for Free

A Historical Look at U.S. GAAP Essay ABSTRACT This paper discusses the historical development of generally accepted accounting principles through its contributing sources from 1930 to the present. U.S. Businesses had been using double entry accounting since the 1800s yet no uniform accounting practices had been introduced until the American Institute of Accountants (AIA) recommended to the New York Stock Exchange in 1932, †¦Ã¢â‚¬ five broad principles of accounting which have won fairly general acceptance†¦Ã¢â‚¬ , (Zeff, 2005, para. 4). In which, the terms â€Å"fairly present† and â€Å"in accordance with† were first used followed up with â€Å"generally accepted accounting principles†. Later, a sixth principle was approved. These recommendations were based on the three assumptions that all business transactions were apart from the business owner, all transaction currencies measured in the US dollar, the assumption of time and the matching principle. Thus establishing a foundation of which all future accounting principles are based. The AIA formed the Committee on Accounting Procedures (CAP) to publish Accounting Research Bulletins (ARB) on GAAP under the authority of the Security and Exchange Commission (SEC) created by the Securities Act of 1934. The CAP was later reorganized into the Accounting Principles Board (APB) that issued Opinions between 1959 and 1973. The Financial Accounting Standards Board (FASB) has been the source for private sector generally accepted accounting principles since 1973. Input by the private sector has been crucial to the development of GAAP since 1930. Historically, GAAP is influenced by the business condition and public interest. The Great Depression left the public with little faith in the private sector. Although the knowledge and experience of businesses would be consulted for standards; businesses were not trusted to set and regulate accounting standards. A common practice in the 1920s was to adjust asset values upward to the highest market value arguably misleading investors prior to the 1929 crash (Zeff, 2005, para. 10). In response, CAP and the SEC strongly mandated historical cost accounting as the acceptable basis of reporting. Shortly after, the U.S. was brought into WWII directing the CAP’s focus to issues pertaining to war time accounting. In addition, the CAP addressed the issues of the exclusion of unrealized profit from income, the use of capital surplus to offset losses, and notes and accounts receivable from officers, employees, and affiliated companies. The most notable item during the CAP’s tenure summed up was its ARBs issued in response to congress’s decision permitting companies to use the LIFO inventory method. This was a rare instance that tax policy influenced GAAP and was initially directed to companies purchasing natural metals because the FIFO method was equated to higher income taxes due to the time lapse between the asset’s acquisition and sale (Zeff, 2005). The method was available to all industries in 1939. While CAP was praised for addressing questionable reporting practices prior to the crash; it was mostly labeled as weak by critics for failing to set a uniform accounting framework to mitigate comparability issues. At the advice of the AIA, now known as the AICPA, the Accounting Principles Board replaced the CAP. ARB 43 was quickly published to restate all Accounting Research Bulletins and eliminate any superseded ARBs. The research driven APB published 31 opinions. The first few answered reporting questions regarding the investment credit per the Revenue Act of 1962 allotting businesses a credit for a â€Å"†¦specified percentage of the cost of certain depreciable assets placed into service after 1961† (FASB, 1962, para.1). The board concluded that the credit may be recorded as an offset to net income over the asset’s life or as a reduction in acquisition cost during the period it occurred. This is important because it is a conceptual precursor to today’s section 179 and bonus depreciation credits of which most small and medium sized businesses depend on and consider when determining capital investments. All opinions regarding credits and other tax reporting issues were later superseded by the FASB’s statement number 109, Accounting for Income Tax. Many of the APB’s remaining opinions dealt with emerging issues brought about by the postindustrial economy. For instance, the board developed guidelines for intangible assets such as goodwill, the equity method of accounting for common stock, accounting for employee stock options, the reporting of extraordinary items in the income statement, and set the criteria to use pooling of interest or the purchase method in business combinations. The most controversial accomplishment of the APB was its 1970 publication Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises. The board’s issuance of this as a non-authoritative â€Å"standard† rather than opinion was met with negative criticism as it failed to commit to any conceptual framework solutions and reaffirmed the fundamental disagreement among members on this topic. The board was soon after dissolved and replaced by the FASB with new, independent members in 1973. Nearly all APB Opinions were superseded by FASB statements (FAS) at different points in time. The FASB remains the authoritative source for private sector accounting practices today. The Sarbanes Oxley Act of 2002 restated the FASB’s position in setting accounting standards. The FASB does not have the authority to enforce standards. The responsibility has always been with managers to prepare and file financial statements in accordance to GAAP with the SEC. Auditors, overseen by the Public Company Accounting Oversight Board (PCAOB), issue opinions on the conformity and accuracy of the financial statements. The role of auditors has become increasingly crucial in the post Enron era. The FASB remains committed to addressing any deficiencies in the reporting process and meeting regularly with the PCAOB and SEC to prevent future financial disasters. Probably the most serious issues to date addressed by the FASB resulted from the subprime mortgage crisis and the subsequent financial crisis of 2008. According to Leslie Seidman (2011), chairman of the FASB, high profile controversy relating to the determination of the fair value of assets and liabilities in an illiquid market prompted the issuance of FAS 157, Fair Value Measurements. Effective November 2007, the standard expanded disclosure for fair value measurements and included changes in fair value practice â€Å"†¦ for certain entities† (FASB, 2006, para. 1). The FAS 133 released in January 2008 provided new and additional guidance on derivatives and designated a team within the FASB to assist with statement implementation. The FASB works to â€Å"harmonize† the previously mentioned standards and all others with International Financial Reporting Standards (IFRS). Discussion of international accounting principles has occurred for decades and an International Accounting Standards Committee (IASC) has existed since 1973. It was not until the 1990s when globalization motivated the FASB to deliberate a strategic plan for international activities. In 2002, the FASB and IASB started collaborating to â€Å"converge† US GAAP and International Accounting Standards. A memorandum of understanding was released by the two boards in 2006 and amended in 2008. In 2011, the FASB sent a letter to the IFRS Foundation Trustees describing its views on many key issues. The FASB continues to balance long term IASB projects with its work on issues relating to US GAAP. REFERENCES Financial Accounting Standards Board. (1962). APB 2: Accounting for the â€Å"Investment Credit†. Retrieved from http://www.fasb.org/cs/BlobServer?blobkey=idblobwhere=1175820900137blobheader=application%2Fpdfblobcol=urldatablobtable=MungoBlobs Financial Accounting Standards Board. (2006). Summary of Statement No. 157. Fair Value Measurements. Retrieved from http://www.fasb.org/summary/stsum157.shtml Financial Accounting Standards Board. (2012). International Convergence of Accounting Standards –Overview. IASB-FASB Update Report. Retrieved from http://www.fasb.org/jsp/FASB/Page/SectionPagecid=1176156245663 Seidman, L.F. â€Å"The Role of the Accounting Profession in Preventing Another Financial Crisis.† U.S. Senate Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance, and Investment [Testimony]. FASB. April 6, 2011. Zeff, S. A. (2005). The Evolution of U.S. GAAP: The Political Forces behind Professional Standards. The CPA Joural, Retrieved fro m http://www.nysscpa.org/cpajournal/2005/105/infocus/p18.htm

Animal Farm: Utopia :: Animal Farm Essays

Animal Farm: Utopia The definition of Utopia is "no place." A Utopia is an ideal society in which the social, political, and economic evils afflicting human kind have been wiped out. This is an idea displayed in communist governments. In the novel, Animal Farm, by George Orwell Old Major's ideas of a Utopia are changed because of Napoleon's bad leadership. Old Major explains his dreams and ideas to all the animals before he dies. At his speech all the animals go to hear what Old Major has to say. This happens on the night that Mr. Jones comes home drunk. Old Major explains his ideas to all the animals: Man is the only creature that consumes without producing. He does not give milk, he does not lay eggs, he is too weak to pull the plow, he cannot run fast enough to catch rabbits. Yet he is lord of all the animals. (p.19) This speech gets all the animals riled up and sends the toughts of getting rid of man. Old Major then teaches them the song the Beasts of England which teaches them the "great" life without man and with no more bad leaders: Beasts of England, beasts of Ireland, Beasts of every land and clime, Hearken to my joyful tidings, Of the golden future time. Soon or late the day is coming, Tyrant Man shall be o'erthrown, And the fruitful fields of England, Shall be trod by beasts alone. Rings shall vanish from our noses, And the harness from our back, Bit and spur shall rust forever, Cruel whips no more shall crack. Riches more than mind can picture, Wheat and barley, oats and hay, Clover, beans, and mangel-wurzels Shall be ours upon the day...(p.22-23) After the song the animals were even more excited. They sing the song so loud it wakes Mr. Jones up. Mr. Jones starts firing his gun into the darkness. This quickly scatters the animals. Three days later Old Major dies so Snowball and Napoleon take over but Napoleon wants all the power. Snowball does a lot of research and planing but Napoleon wants to take over completely by himself. So Napoleon frames Snowball so he can become the leader. Orwell tells about the meeting to discuss the windmill: By the time he had finished speaking, there was no dought as to which way the vote would go. But just at this moment Napoleon stood up and...uttered a high pitched whimper of a kind no one had ever heard...nine enormous dogs wearing brass studded collars came...they dashed strait for snowball. (P.57) This scene shows Napoleon is a tyrant and wants all the power to himself and

Postmodernism Essay

Different material, methods and media’s have been used in postmodern art, such as painting fine art, technology, architecture and fashion. A study of various types of powerful societal changes through time is tackled through art. These changes comprise of gender identity, globalisation growth, political power etc. Introduction The expression of Art has always been influential; many artists use it as a tactic to exploit political truths and ideas. Postmodernism is a â€Å"movement reacting against modernism, especially by drawing attention to former conventions† (pg821). This form of art allowed a new way of looking at reality in a society that is constantly reassessing its culture and values. Postmodern art focuses on a mixture of high and low cultures and dominant ideas; it went against repression, sexism, racism, political power, and violence. Deconstructing truths criticises and analyses contemporary issues. These deconstructionist feed on controversy, artists such as Alessandro Mendini, Andy Warhol, Jenny Holzer create colourful and ruinous, luxurious and outrageous artwork. The art allowed radical freedom to design, funny gestures confrontation and occasionally absurd. It was a style that has new self-awareness. Postmodernism rebelled against modernism; it was an attack on what had come before as it explored and disparaged any unspoken leading concepts and social customs. The disillusionment from World War II heavily influenced postmodern art. The style doesn’t have a clear central hierarchy or organising principle; it uses melancholy, extreme complexity, contradiction, ambiguity, diversity and interconnectedness. Loud colours, bold patterns, historical quotation and whit are used. During the 60s, critical practices of postmodernism were applied mainly in Italy. The idea of ‘Function follows form’ is abandoned. Exaggerated proportion and outrageous texture for the sake of decoration. Designers such as Ettore Sottsass and Alessandro Mendini who challenged social norms and the traditional taste of design. Italian born designer and architect, Alessandro Mendini played a part in postmodern design. He creates graphics, furniture, interiors, paintings and architectures. His work of ‘Destruction of the Monumento da Casa (Household Monument) is an enlarged photograph of a modernist chair. This literally displays the destroying of the past, the end of modernism and the beginning of postmodernism. It was an attack on what had come before, Mendini brought the chair to a stone quarry and set the chair on fire, photos were captured during the process in 1974. Popular culture, irony, historicism, eclecticism and pluralism are embraced by postmodernism. The artist believed that something new design would grow from the burning remains. One of the most iconic post-modern designs is the Proust armchair by Alessandro Mendini. He chose to add Signac painting as the pattern on a ready-made replica of an 18th century armchair. American language conceptual artist, Jenny Holzer is famous for her short statements. The postmodern fashion in the 80’s was a time when women were in power and this was mirrored in physicality and clothes. The artist uses modern information to expose and address the politics of discourse. The ‘Abuse of Power Comes as No Surprise’ by Hozler is one of her many controversial artworks. Jenny Hozler worked outside the regular conventions, as she believed that simplified phrases are the quickest way for everyone to comprehend. A lot of Jenny Hozler’s work victimises the woman, this method allows the audience to basically read the violence male dominance against women. Words such as ‘Crack the Pelvis so she lies right, this a mistake. When she dies you cannot repeat the act†¦Ã¢â‚¬â„¢ the brutal yet vivid words suggest male power over women. In order to communicate to foreign countries, her work was translated multiple times. Hozler’s techniques include a range of multimedia, posters, hats, T-shirts and L. E. D signs on large architecture. She received many negative feedbacks by the public, therefore, withdrew from her career until 1993. The postmodern artist came back with a new approach to immaterial; she is still driven against murder plus sexual pleasure, hence initiated a new series named ‘Lustmord’. Fine Art is also found in post modernism. Techniques found in painting were super-realism, mannered, academic, neoclassical, decorative, and self-conscious stylization. Originality had ended and there is a lot past styles referencing. Postmodern artist, David Ligare paintings looked extremely realistic. He focused on still life painting, Ligare believes that there is no limit and virtually anything now could be considered art, hence makes him a postmodern artist. David Ligare does narrative paintings based on Greco/Toman culture. Marcel Duchamp’s artwork incorporated jokes to add humour to his visual. Duchamp has made numerous pastiche works; his most famous is the ‘L. H. O. O. Q’, which stands for ‘Elle a chaud au cul’. It was a rebel against traditional art was the dominant idea of the time. Duchamp’s added moustache and beard to the postcard with the Mona Lisa, which contradicts regular conventions of the time. He wanted to take artistry lightly; it was an act of rebel against convention. This technique became known as ‘appropriation’, it is the idea of manipulating famous historical art pieces. This practice has become common in today’s art. Andy Warhol works exemplifies the final stage of postmodernism. Warhol’s paintings had always had something controversial, as theorist Fredric Jameson states, ‘they ought to be powerful and critical political statements’ Andy Warhol is a contemporary artist, which expresses the postmodernism of society though his artistry. Through his artwork, his expression seems to be very anarchy and chaotic, especially the major use of the primary and bold colours whereas in the mainstream artistry it is very subtle due to the dark or complimentary colours which can often be seen as conservative. Warhol’s ‘Dollar Sign’ from 1981 deconstructs the truth about money. The painting suggest money’s strength, its addiction and tactic for conspiracy, His artwork were powerful and held critical political statements because they were billboard-like images. One of his pieces was of the North Korean leader, Kim John IL. Normally in society Kim John IL would not be even spoken of due to the high political power he has over North Korea. And the fragility between other nations that Kim John IL has. Andy Warhol has done a piece of this leader using contrasting and chaotic colours that seemed random and unusual. Warhol used appropriation, taking and creating pastiche references. As Andy Warhol states, â€Å"Art is what you can get away with†. Yasumasa Morimura uses humour with referencing to historical art. His postmodernist artworks have the idea of rejecting a single fixed meaning in an image or artwork. He is a controversial Japanese artist who displaces societal currents in Japanese culture. Western assimilation, capitalism and gender values are shown in his designs. Yasumasa is an illusive creator with no boundaries; this sets his work off to a guttural response. He is best known for mimicking great subjects, in particular western art. One of his works uses historical art as reference is the ‘Blinded by the Light’ 1991, which was inspired by the ‘ Parable for the Blind’ by Pieter Brueghel in 1568. Morimura symbolises a satirical message on Western invasion. Yasumasa Morimura caused controversy by highlighting historical influences and transforming into the postmodern art world with eastern and western culture, sexuality and gender identity. His background influenced Morimura’s, he was an outsider dominated by western culture and art. Technology advancement such as digital editing allowed his work to become flawless. In the racist imagination of western culture, they perceive Asian men with weak physically, equivalent to a little white girl. Morimura embraces his influences and mixes his sexual influence with modern culture. This is reflected in his series of self-portraits, e. g. Morimura as Monroe. Throughout the postmodern period, globalisation had become widespread, the artist felt as if he was invaded by foreign ideas and culture. In response, he invaded western culture through their art, by slapping his face on the Mona Lisa or the Infanta Margarita. Famous artist, Barbara Kruger exploited truths through her works of being a graphic designer, art director, and picture editor. Rather than creating her own images, she uses images and juxtaposes them. She used her techniques and skills of being a graphic designer and worked on political, social feminist provocations, religion, sex, racial and gender stereotypes, consumerism, corporate greed, and power. Her techniques consist of using media sources and words and directly collaging them over each other. Her signature look comprises of cropped, large-scale, black and white photographic pictures against black, white and red sans serif letterform. They hold raucous, pithy, ironic sayings. The poster, ‘Your Body is a battleground’ proposes the idea of re-conditioning gender stereotypes. Originally, the image was used in Washington DC to advocate a pro-choice position and reproductive rights for women. This raises the issue of power, patriarchy, stereotyping and consumption. The poster has a black and white image of a woman’s face that is split symmetrically with direct eye contact. The positive and negative space could highlight ‘good vs. bad’. Judging from the woman’s hair and makeup, she appears to be a housewife. The image represents that women cannot be sold, it illustrated a political setting and subsequently their identities are favourably polished.

Understanding the importance of Variable Impact on Stock Prices - Free Essay Example

Sample details Pages: 14 Words: 4165 Downloads: 9 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? In this chapter the available literature on the topic will be reviewed critically to enable a better understanding of the variables impacting on stock prices. This section examines different studies published by researchers, followed by empirical evidence on macroeconomic variables that could affect the stock price. 2.1 Theoretical Review In this study we will examine the relationship between macroeconomic variables and stock prices. Three variables namely money supply, inflation and exchange rate will be discussed. Don’t waste time! Our writers will create an original "Understanding the importance of Variable Impact on Stock Prices" essay for you Create order 2.1.1 Macroeconomic Variables and stock prices A firms economic; industry and stock analysis should be taken in account during the valuation process (Reily and Brown,2006; 361). The top down approach (the three-step) approach asserts that both the economy and industry affects the returns of individual stocks on the valuation process compared to the bottoms-up approach which indicate that it is possible to provide superior returns to find stock irrespective of the direction of the economy and state of the industry. The basic difference between these two approaches is how investors regard the importance of economic and industry influences on individual stock returns. Various studies analyzing the results of economic variables on stock returns have maintained the top-down investment process. The economic background and the performance of firms industry affect the value of security and its rate of return. Thus some macroeconomic variables would be regarded as a priori of risk that are common to all companies. The relationship be tween stock prices and macroeconomic variables is well illustrated by the Dividend Discount Model (DDM) proposed by Miller and Modigliani (1961) than any other theoretical stock valuation model. The stocks value is still just the present value of its future cash flows. Since the only cash flows an equity owner ever gets are dividends, the model is called the dividend discount model. Therefore, the current price of share of common stock is presented as follows: Where Po = the current stock price D = the expected cash dividend, n = the expected year in which the payment of dividend is expected k = the required rate of return. If an investor sells the stock, the purchaser of the stock is just buying the remaining dividend stream, so the stocks value is still determined by the dividend it pays. The most widely known DDM model is the Gordon growth model (Gordon, 1962). It expresses the value of a stock based on a constant growth rate of dividends. The equation shows that the value of a stock is determined by the current dividend, its growth rate and the discount rate. Gordon Growth Model has simplified the valuation of stock as follows: This equation simplifies to the infinite period dividend discount model. Projected stock value P=D/k-g where D = expected dividend per share one year from now; k = required rate of return for equity investor; G = growth rate in dividends This model is appropriate for finding the stock value with the assumptions that dividend are expected to continue growing at a constant rate and the growth rate is supposed to be lower than the required return on equity, ke In accordance with the model the current price of an equity share equals the present value of the future cash flows. Hence, the determinants of share prices are the required rate of return and expected cash flows implying that economic factors that affect the expected future cash flow and required rate of return influence the share price. (Humpe and Mcmillan, 2007, Gan 2006) Another method of associating macroeconomics variables and stock market returns is through arbitrage pricing (APT) (Ross,1976), where multiple risk factors can analyze asset returns. It may be used as a cumulative stock market scheme, where a change in a given macroeconomic variable could reflect a change in an underlying systemic risk factor affecting future returns. Some of the empirical work on APT theory, combining the state of the macroeconomic to stock returns, is identified by modeling a short run relationship between macroeconomic variables and stock price in terms of first difference, estimating trend stationarity. Subsequently, Chen, Roll and Ross (1986), have showed that economic forces affect discount rates, the ability of  ¬Ãƒâ€šÃ‚ rms to bring about cash  ¬Ãƒ ¢Ã¢â€š ¬Ã… ¡ows, and future dividend payouts, given the assumption that a long-term equilibrium existed among macroeconomic variables and stock p rices. Granger (1986) says that the efficacy of this asssumption can be analyzed using a cointegration analysis. In statistics, the existence of cointegration between appropriate factors indicates that a linear combination of nonstationary time series shows a stationary series. In economics, the presence of such a linear combination creates a long term equilibrium relationship. Chen, Roll and Ross 1986 analyze the impact of macroeconomics variables on the stock return. The economic theory says that stock prices should reflect anticipations about futures corporate performance which typically reflect the level of economic activities. Thus, if stock prices correctly reflect the underlying fundamentals, then the stock prices should be applied as crucial indicators of future economic activity. Nevertheless, if economic activities reflect the movement of stock prices, then the results should be the opposite, meaning economic activities should lead stock price. Thus the causal relations hip and correlations between economics factors and stock prices are important in formulating the countrys macroeconomic policy. According to Oberuc (2004), the economic factors commonly linked with stock prices by researchers are industrial production, dividend yield, interest rate, term spread, default spread, exchange rates, inflation ,money supply, GNP or GDP and previous stock returns, among others. 2.1.2 Money supply and stock prices Monetary policy influences the general economy through a transmission mechanism. In an expansionary monetary policy, the government creates excess liquidity through open market operation, resulting in an increase in bond prices and lowering interest rate which leads to lower required rate of return and thus higher stock price. Furthermore, higher money supply will lead to higher stock prices due to higher demand. Thus, resulting in higher inflation and higher nominal interest rate (Fisher equation). Higher interest rate leads to higher required rate of return and thus lower stock price. Friedman and Schwartz (1963) analyzed the relationship between money supply and stock returns by considering that the growth rate of money supply would affect the economy and thus the expected stock returns. Peter Sellin (2001) suggest that the money supply will affect stock price only if a change in money supply change assumption about future monetary policy. He suggests that a positive mo ney supply shock will compel people to predict tightening monetary policy in the future. The subsequent rise in bidding for bonds will raise the current rate of interest. As interest rate increase, the discount rates rise as well, and the present value of future earnings decline. Thereby decreasing stock prices. In addition, Sellin (2001) denotes economic activities diminish in accordance to a rise in interest rates, which further reduces stock prices. On the other hand, the economists argue that a positive money supply shock will lead to rise in stock prices. They explain that a change in the money supply supplies information on money demand, which is caused by future output expectations. If the money supply rise, it implies that money demand is rising, which, effectively, indicates a rise in economic activity. Higher economic activity means higher cash flows, causing stock prices to rise. 2.1.3 Inflation and stock prices Inflation rate varies from one period to another, it is important to consider the effect of inflation on stock prices. In theory stocks should be inflation neutral, with only unanticipated inflation negatively impacting stock prices. Inflation has a large impact on stock valuations. Therefore, lower inflation means higher price/earnings ratios and higher stock prices and vice versa. Fisher (1930) speculates that the nominal rate of interest is made up of two components: the expected rate of inflation (ÃÆ' Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬te) and the real rate of interest (rt): it = rt + ÃÆ' Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬te This simple equation is based on the fact that economic agents , need to be compensated if their purchasing power has decreased due to an increase in the price level. What has come to be concluded as fisher effect creates a one for one relationship between expected inflation and nominal interest rates and the ex ante real rate of interest that remains constant over the over the long-run. Applying the generalized Fisher hypothesis Gultekin (1983) study find a negative regression coefficient between inflation and stock returns for 26 countries from 1947 to 1979.Thus this indicates that it could not find support for this hypothesis. In literature a negative relationship is explained between inflation and stock prices by Fama and Schwert (1977), Chen, Roll and Ross (1986) because a rise in inflation rate is prone to lead to economic tightening policies which inturn raised the nominal risk free rate and hence the discount rate in the valuation model. A number of hypotheses have been advanced in the literature to explain this negative relationship. (i) The proxy hypothesis by Fama 1981 which include a correlation between expected inflation and expected real economic growth. He tried to explain the proxy hypothesis, the relationship between returns and inflation is not true relation, it is only the proxy relationship between stock return and growth ra te of real GNP with the inverse relationship between stock returns and inflation. It illustrates that high inflation rate may reduced money demand which lowers growth in real activity. Nevertheless, the rise in inflation rate decreases the future expected profit which will impact on the fall in stock prices through the Fisher (1930) hypothesis asserting that real returns are determined by real factors. The author believed that if real output growth is controlled the negative relation will cease. (ii) Modigliani and Cohn (1979) -inflation relation maybe that investors suffer from money illusion. If investors wrongly use the inflated nominal interest rate to discount future dividends they will minimize the value of equity with a resulting fall in prices. (iii)Fieldstein (1980)- the US inflation non-neutralities tax code which deforms accounting profits. He presents that taxation associated to depreciation and capital gain is affected by inflation which consequently affects asset valuation. He explained that rising inflation decreases share prices because of the interaction of inflation with the tax system. 2.1.4 Exchange rate and stock prices In literature a number of hypotheses support the relationship between exchange rate and stock prices. (i)Goods market approaches (Dornbusch and Fischer, 1980) This approach says that changes in exchange rates influence the competitiveness of a firm as fluctuations in exchange rate affects the value of the earnings and cost of its funds as many companies borrow in foreign currencies to fund their operations and hence its stock price. A currency depreciation makes exporting goods attractive and leads to an increase in foreign demand and hence revenue for the firm and its value would appreciate and hence the stock prices. Moreover, an appreciating currency reduces profits for an exporting firm because it leads to a fall in foreign demand of its products. Nevertheless, the sensitivity of the value of an importing firm to exchange rate changes is just the opposite to that of an exporting firm. Therefore an appreciating currency has both a negative and a positive effect on the domestic stock market for an export-dominant and an import-dominated country, respectively (Ma and Kao, 1990). Furthermore, variations in exchange rates affect a f irms transaction exposure. That is, exchange rate movements also influence the value of a firms future payables (or receivables) denominated in foreign currency. Hence on a macro basis, the impact of exchange rate fluctuations on stock market seems to depend on both the importance of a countrys international trades in its economy and the degree of the trade imbalance. (ii)Portfolio Balance approach This approach lays emphasis on the role of capital account transaction. (Tahir and Ghani, 2004). In this approach, rising (falling) of stock prices would attract capital inflows from international investors which may cause a rise in the demand for a countrys currency. An increase (decrease) in stock prices will lead to an appreciation (depreciation) in exchange rates due to an increase in the demand (supply) of local currency. However, an exogenous increase in domestic stock prices will lead to a rise in domestic wealth and as a result lead to an increase in the demand for money, thus increasing interest rates. High interest rates will cause capital inflows resulting in an appreciation of domestic currency (Krueger, 1983). 2.2 Empirical Review 2.2.1 Macroeconomics Variables and Stock prices The work introduced by Chen, Roll and Ross (1986) explained that macroeconomic variables were affecting asset returns systematically applying the APT models namely, the spread between long and short-term interest rate, expected and unexpected inflation , industrial production and the spread between high- and low- grade bonds using 20 equally weighted portfolios of US securities from1958 to 1984. They take Industrial production to proxy for the current real cash flows, inflation influences returns as nominal cash flow growth rates are not equal to expected inflation rate, the spread between long and short term interest rates and the high or low grade bond spread affect the choice of discount rate. He found that a long term equilibrium relationship exists between stock prices and macroeconomic variables and conclude asset prices react sensitively to economic news, especially to unanticipated news. However, Hamao (1988) analyze the Japanese equity market by applying the multi-facto r APT similar to Chen, Roll and Ross (1986) in US security market. Factors examined include (1) industrial production, (2) inflation, (3) investor confidence, (4) interest rate, (5) foreign exchange, and (6) oil prices. He found that stock returns are significantly affected by changes in expected inflation and unanticipated changes in risk premia and in the slope of the term structure of interest rates and that changes in monthly production and trade terms appear insignificant in asset pricing whereas unexpected changes in exchange rate and changes in oil prices are not priced in the stock market. Using the multivariate analysis, Mahmood et al (2009) analyzed the relationship between economic variables and stock price in six Asian Pacific countries . By using monthly data on foreign exchange rate , consumer price index, industrial production and stock price he finds that there is a long run relationship between the variables in Japan, Korea, Hong Kong and Australia. There is no s uch relationship between stock price and macroeconomic variables in the short run period for all countires except Thailand and Hong Kong. The results show evidence of short run relationship running from output to stock price in Thailand and between foreign exchange rate and stock price in Hong Kong. This relationship will help investors in taking effective investment decisions and policy-makers in implementing policies to support more capital inflow into the capital markets of the specific countries. . Employing cointegration analysis, Chowdhury A.R(1995) examine the issue of informational efficiency in the Dhaka Stock Exchange in Bangladesh. By using monthly data on narrow and broad money supply and stock price, he finds that the bivariate models indicate independence between stock prices and the monetary aggregated implying the market is informationally inefficient. Nonetheless, it is distinguished that bivariate models were unsuccessful to address the obvious possibility that the relationship may be driven by another variable acting both on the stock price and the money supply. Therefore the multivariate models were estimated by using two more variables namely industrial production index and the nominal exchange rate. This model demonstrates a unidirectional causality from the money supply to stock price. These results appear to be indifferent to the functional form of the variables used. Thus stock price do not reflect immediate changes in monetary policy and fail to anticipa te future growth in money supply thus the market is inefficient. Using Johansens (1998) VECM, Mukherjee and Naka (1995) examine the dynamic relationship between six macroeconomic variables and the Japanese stock market. They considered monthly data from January 1971 to December 1990 of Japanese stock market and macroeconomic variables, involving money supply, exchange rate, industrial production, inflation, long-term government bond rate and call money rate. A VECM model of seven equations was used. Obtained results illustrate that stock returns are cointegrated with a set of macroeconomic variables by providing long term equilibrium. He found a positive relationship between, money supply, exchange rate real activity and short term interest rate and a negative relationship between long term bond and inflation Using quarterly data from 1991 to 2007 Adam and Tweneboah (2008) analyzed the impact of macroeconomic variables on stock prices in Ghana using quarterly data from 1991 to 2007. They examined both the long-run and short-run dynamic relationships between the stock market index and the economic factors-inward foreign direct investment, treasury bill rate, consumer price index, average oil prices and exchange rates using a multivariate analysis and developed the following equation: Where ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²0 is a constant , ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²1,ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦.ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²4 are the sensitivity of each of the macroeconomic variables to stock price and is a stationary error correction term. Variables Concept LDSI Log of stock index LCPI Log of consumer price index LXR Log of exchange rate LTB Log of treasury bills LFDI Log of foreign direct investment They found a long run cointegrating relation between macroeconomic factors and stock prices. The VECM analysis illustrates that the lagged values of inflation and interest rate have a significant impact on the stock market whereas the inward fore ign direct investments, oil prices, and the exchange rate show weak influence on price changes. To examine the informational efficiency of stock market in Malaysia, Ibrahim (1999) study the dynamic relation between stock prices and seven macroeconomic variables from 1977 to 1996 and suggests there is cointegration between credit aggregates, consumer prices, foreign reserves and stock prices and there is Granger causality between foreign reserves and exchange rate in the short run. The findings strongly suggest informational inefficiency of the Malaysian market. The analysis shows that stock prices expect variation in the money supply, industrial production, and the exchange rate while they respond to the changes from long run path of credit aggregates, consumer prices and foreign reserves. 2.2.2 Money and Stock Market Ho (1983) analyzed the relationship of money supply and stock returns for six Asian Pacific countries. The countries studied were Hong Kong, Australia, Philippines, Japan, Thailand and Singapore. By using monthly data for stock price and two money supply, M1 and M2 and by applying cointegration test and causality test , he found that there is a unidirectional causality from money supply to stock price in Japan and Philippines but found bidirectional causality in Singapore. However, Hong Kong, Australia and Thailand also found unidirectional causality but only for M2. Using quarterly data for the period 1961 to 1986 Friedman (1996), analyzed the role of the real stock price as a variable in the demand function for money .He found that real quantity of money (defined as M2) demanded relative to income is positively related to the deflated price of equities (Standard and Poors composite) three quarters earlier and negatively related to the simultaneous real stock price. The positiv e relationship seemed to reflect a wealth effect; the negative, a substitution effect. The wealth effect appears stronger than the substitution effect. The volume of transactions has an appreciable impact on M1 velocity but not on M2 velocity. 2.2.3 Inflation and Stock prices According to Famas (1981) proxy hypothesis, expected inflation is negatively correlated with anticipated real activity that there should be a negative relationship. Kaul (1990) examined the relationship between expected inflation and the stock market and found positive returns on the stock market. He clearly models the relationship between expected inflation and stock market returns rather than using the short term interest rate as a proxy for expected inflation; his finding is consistent with Famas (1981) proxy hypothesis and demonstrates that the relationship between stock returns and expected inflation in the US is significant and negative. Fama and Schwert (1977) found that common stock returns were negatively related to the expected component of the inflation rate and apparently also to the unexpected component from the period 1953-1971. They claimed, We can reject the hypothesis that common stocks are a hedge against the expected monthly inflation rate. Arjoon.R et al ( 2010) examine the long run relationship between inflation and real stock price in South Africa by employing the bivariate vector autoregressive methodology developed by King and Watson (1997). The results indicate that real stock prices are consistent to permanent changes in the long run. The impulse response showed a positive stock price response to a permanent shock in inflation in the long run, implying that any deviations in the short run stock price will be adjusted towards the long run. Hence, the long run estimates of the real stock price response to a permanent inflation shock that are zero or positive are theoretically reasonable. It is concluded that inflation does not lower the real value of stocks in South Africa at least in the long run. Maysami 2004, reported a positive relation between inflation and Singapore stock returns as such it is contrary to the results of Fama and Schwert (1977), Nelson (1976). Adam and Tweneboah for Ghana (2008) also reported a positive re lationship between inflation and stock returns. In case of CPI, the US and Japan shows a negative coefficient for the stock price.(Humpe Macmillan 2007).These results differ from the empirical works which have obtained a significant negative relationship between stock prices and inflation. 2.2.4 Exchange rate and Stock prices The results of these studies are, however, inconclusive. Authors Name Time Frame Methodology Results of Exchange Rates and Stock prices Aggarwal (1981) 1974-1978 US Correlation analysis Positive correlation Soenen and Hanniger (1988) 1980-1986 Correlation analysis Strong negative Abdalla and Murinde (1997) 1985-1994 Pakistan Granger causality test Unidirectional causality Amare and Mohsin (2000) 1980-1998 Philippines Long run relationship Muhammad and Rasheed (2002) 1994-2000 Inida Cointegration and Granger causality test, VECM No association between exchange rate and stock price Kim (2003) 1974-1998 U.S.A ECM and Variance Decomposition Negartive relationship between SP and the exchange rate Doong et al. (2005) Thailand Cointegration and Granger Causality Bidirectional causality Aggarwal (1981) analyzed the impact of exchange rate changes in US stock prices by using monthly data from 1974 to 1978 for the floating exchange rate period. Employing cointegration analysis he found that there is a positive relationship betw een the US dollar and the changes in stock prices. However, Soenen and Hennigar (1980) analyzed the exchange rate and stock price in the same market but at different time period found a negative relationship. Moreover, Solnik(1987) examine the influence of several economic variables including exchange rates on stock prices in nine industrialized countries. He found a weak positive relation between real stock return differentials and changes in the real exchange rates and found that this would support the idea that anticipated real growth has a positive influence on the exchange rate. Hence this weak relation might be generated by the fact that stock returns are a poor proxy for real economic growth and a more complete model should be designated. The result indicates that the exchange rate proved to be a non significant factor in explaining the development of stock price. By examining the relationship between exchange rate and stock price for eight advanced economies from 1985 to 1991 Ajay and Mougoue (1996) found that there are significant short run and long run feedback relations between these two financial markets. An increase in stock price has a negative short run effects as well as a positive long run effect on domestic currency value. Also, currency depreciation has a negative both short run and long run effect on the stock market. In applying both the Engle-Granger AND Johansens test Nieh and Lee (2001) found no significant long run relationship between stock prices and exchange rate in G-7 countries, and they conclude that each countrys difference in economic stage, government policy and expectation pattern may explain the differing results. Furthermore, they found significant short term relationships for these countries. Nevertheless, in some countries, stock prices and exchange rate may serve to predict the future paths of these variables. For instance, they found that currency depreciation stimulates Canadian and UK stocks markets with a on e-day lag, and that increases in stock prices cause currency depreciation in Italy and Japan, again with a one- day lag. Economists have tried to examine exchange rates-stock price relationship for a long time. Most studies find some relations and causality, other find no causality between these two variables. Furthermore, direction of causality changes from one economy to another. The inconsistency in the findings is due to the different time lags and frequency of data used. The reason for these differences can be explained by time period used for data, econometric models used and economic policies of countries. 2.3 Conclusion The relation between inflation and stock prices should be negative as hypothesized by Fama (1981),he argued that the main determinant of the stock price is the companys future earnings potential .If inflation and future expected output in the economy are negatively correlated, then inflation may proxy for future real output. This may lead to a negative relationship between stock price and inflation. As the result of studies is conflicting, the actual relationship between money supply and stock prices is an empirical question and the effect varies over countries and time. Likewise money supply and inflation, the relationship between stock return and exchange rate is not stable overtime and that there are differences among countries regardless of either developed or emerging markets. The relationship between stock prices and rate of interest should be negative. An increase in interest rates will increase the required rate of return, causing stock prices to fall.