Convergence of Prices to Fundamental Values and Beating the Market by Accounting Information

The purpose of this study is to investigate empirically the one of the underlying assumptions of economical and financial models relating to investor's behavior as "Rationality" and to obtain some evidence about it from Tehran's Stock Exchanges (TSE). To do so, following some studies (such as Frankel and Lee, 1998; Ali et al., 2003; Xie, 2004), by introducing the concept of "Convergence of Prices to Fundamental Values" and emphasizing on "Value to Price (V/P) Ratio", we have investigated the effectiveness of External Financial Reporting Mechanism. The findings support the prediction ability of V/P ratio with respect to future (normal and abnormal) return estimation. So, the lock of Market Efficiency is approved at least at semi-strong level and we can say that active investors are able to earn abnormal return by fundamental analysis purposively. Also, the primary source of the abnormal earnings, is the convergence of prices to fundamental values of stocks. The correlation between accounting and financial reporting information with market prices is observed, too, and the results show that accounting information affects on forming supply and demand for stocks and therefore, the price changes.