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1、How do users of financial statements react to accounting information?Learning objectivesCompare and contrast capital markets research with behavioural researchDescribe the role of capital markets research in assessing the information content of earnings announcements and accounting disclosuresGive a
2、n overview of what capital markets and behavioural research tell us about the extent to which financial accounting information and particular disclosures are useful to usersHow this fits1.We have examined positive theories of accounting and predicted what will happen under particular circumstances,
3、for example Positive Accounting Theory might lead us to predict that earnings management will take place2.We have examined some of the research evidence to examine whether it happens, for example what evidence is there to suggest that earnings management takes place and is influenced by management i
4、ncentives3.We are now going to examine the research evidence which considers whether it matters, for example do accounting numbers or disclosures have an impact on stock pricesHow do individuals or user groups react to accounting informationCan use capital market research to: assesses the aggregate
5、effect of financial reporting on investorsconsiders only investorsCan use behavioural research to: analyses individual responses to financial reportingexamines decision-making by many groupse.g. bank managers, loan officers, auditorsCapital market research3 things to understandWhat can capital marke
6、ts research tell us about financial statements i.e. what questions have researchers tried to answer?In what ways have researchers examined these questions? What were the findings?What can capital markets research tell us about financial statements?Question : Is accounting information useful to inves
7、tors?Measure the extent to which share prices react to accounting information - earnings announcements i.e. the release of financial statements.Measure the extent to which variability of returns (risk) is affected by financial informationCan also measure reaction to other “events” but this doesnt te
8、ll us anything directly about financial statementsEarnings forecastsMergers and acquisitionsAudit reportsLegislation e.g. Sarbanes-OxleyResearch around earnings announcementsDo investors react to information around earnings?Ball and Brown (1968)tested whether firms with unexpected increases in accou
9、nting earnings had positive abnormal returns, and firms with unexpected decreases had negative abnormal returnsfound:information contained in the annual report, prepared using historical cost was useful to investors85-90% of earnings announcement is anticipated by investors the share price moves gra
10、dually in the run up to the announcement and continues its movement after the announcementmuch of information is obtained from other sourcesFurther work around earnings announcementsInformation content varies between countries and companies the more information in the public domain the less pronounc
11、ed the reaction to an earnings announcement US vs. Australia (Brown 1970)Share price reaction varies depending on whether the change is expected to be permanent or temporary do investors disregard one -offs (Elliott & Hanna 1996) Earnings management?Share price reaction is to earnings and does not c
12、onsider whether the earnings figure is due to discretionary accruals or the reversal of discretionary accruals i.e. investors dont take into account cash flow component of earnings(Sloan 1996)There is competing evidence that the market does react to earnings management (Wahlen 1994)What can capital
13、markets research tell us about financial statements?Question: Are there benefits associated with voluntary disclosure of information i.e. is disclosure useful? Botosan (1997) measures costs of equity capital.Increased disclosure reduces cost of equity capital particularly for firms with low analyst
14、following.What can capital markets research tell us about financial statements?Question: Is recognition in the financial statements more important than disclosure? Compare the share price reaction of firms who disclose with those who recognise.The market reacts to recognition more than it reacts to
15、disclosure (Cotter & Zimmer 2003, Aboody 1996)What about Social & Environmental Reporting?Question: Are there benefits associated with voluntary disclosure of information i.e. is disclosure useful? Ability to raise capital, cost of equity capital Benefits associated with the voluntary disclosure of
16、corporate social responsibility activities Dhaliwal,Li & Yang (2011)Criticisms of CMRIs the market semi-strong efficient?Sub-prime crisis uncertainty, irrationality, over-reliance on past experienceInternet Discussion Sites pump and dump, spreading rumoursMarket doesnt react instantaneously to new i
17、nformation evidence of “drift”Is this the right focus for researchersMany technical criticisms of the models15Behavioural/experimental accounting researchIntroduction to behavioural researchbehavioural research examines how individuals react to various accounting disclosuresgrounded in behavioural d
18、ecision theorygoal is to describe actual decision behaviour, evaluate its quality and develop and test hypotheses of the underlying psychological processesWell focus on user reaction but there are other relevant areas of behavioural researchLibby et al (2002)Users reactionHow do accounting methods a
19、nd disclosure alternatives affect earnings predictions and value estimates?How do investors and analysts use time series properties of earnings to predict future earnings?What determines analyst forecasting and valuation performance?Impact of accounting methods and disclosure alternativesFirms that
20、are identical in economic circumstances except for their choice of accounting alternatives are sometimes judged to be different (Maines 1994) Question: Does placement of items affect judgement?Whether items are placed on the Income Statement rather than the Statement of Changes in Equity affects ana
21、lysts ability to detect earnings management (Maines & McDaniel 2000)Question: Which types of information are most useful to users?in making predictions of financial returns, analysts are found to acquire earnings and sales information more often than other types (Pankoff and Virgil 1970; Mear and Fi
22、rth 1987)studies questioned the provision of current cost information, subjects relied more on historical cost information (Heintz 1973; McIntyre 1973)Research evidence - the presentation of informationdifferent presentation formats found to influence users decisionsincluding bar charts, line graphs
23、, pie charts and tablesResponses to voluntary disclosures how do investors interpret contingent liability disclosures? (Kennedy, Mitchell & Sefcik 1998)Studies examining decision making by loan officers based on whether information is incorporated within the financial statements or included as footn
24、otes found presentation made no difference (Wilkins and Zimmer 1983)Limitations of behavioural researchresearch examining similar issues has generated conflicting resultsdifficult to determine causes of inconsistenciessettings of studies often different to real-world settings - studentsCan we genera
25、lise?very difficult to replicate cues available in the workplacesmall number of subjects often used AssignmentYou can use some of the research evidence to examine the following issues:Summarise the research evidence to critically evaluate the extent to which the usefulness of either SER or Financial Statements are impacted by your chosen topic Outline the implications of the research findings for users of these reports and regulators
