The Role of Financial Reporting in Convergence of Stock Prices to

In this paper, 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 () Ratio", we have investigated the effectiveness of External Financial Reporting Mechanism. To do so, 87 firms from TSE for 1378-1386 (1999-2007) have been studied. The findings show that there is a correlation between Ratio and future stock return (normal or abnormal). 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, and the results show that accounting information affects on forming supply and demand for stocks and therefore, the price changes. The findings of ANOVA show that Buy & Hold return is greater than the strategy return and the Price Convergence of Stock returns is greater, too.