amuri
AUTHORS:
Stefano Cascino Professional investors and
Mark Clatworthy the decision usefulness of financial reporting
Beatriz García Osma
Joachim Gassen
Shahed Imam
Thomas Jeanjean
MARCH
2016
,amuri
Report prepared for ICAS (The Institute of Chartered Accountants of Scotland)
and EFRAG (European Financial Reporting Advisory Group)
by
Stefano Cascino (London School of Economics)
Mark Clatworthy (University of Bristol)
Beatriz García Osma (Universidad Carlos III de Madrid)
Joachim Gassen (Humboldt-Universität zu Berlin)
Shahed Imam (University of Warwick)
Thomas Jeanjean (ESSEC Business School, Paris)
© ICAS and EFRAG (2016)
This report is published for the Research Committee of ICAS and EFRAG.
The views expressed in this report are those of the authors and do not necessarily represent the views of
ICAS or EFRAG.
No responsibility for loss occasioned to any person acting or refraining from action as a result of any material
2 in this publication can be accepted by the authors or publishers.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted,
in any form or by any means, electronic, mechanical, photocopy, recording or otherwise, without prior
permission of the publishers.
Professional investors and the decision usefulness of financial reporting - EFRAG - ICAS Report
,amuri
Table of contents
Foreword 4
Acknowledgements 6
Executive summary 7
1. Introduction 12
2. Background and prior literature 14
3. Research methods and sample 19
4. Research findings 28
5. Summary and implications 56
Endnotes 60
References 62
Appendix 1: The instrument 66
3
Appendix 2: Additional analysis 71
About the authors 73
About ICAS 74
About EFRAG 75
Professional investors and the decision usefulness of financial reporting - EFRAG - ICAS Report
, amuri
Foreword
In 2013 ICAS and EFRAG published a literature review The use of information by capital providers. This review
was commissioned to provide independent evidence for the IASB’s standard setting process, in particular for
the revision of the Conceptual Framework. This work was undertaken by an exceptional team of international
academics, and we were pleased that they were given the opportunity to present the findings of their review to
the IASB members in early 2014.
The review highlighted the need for more research, particularly for new empirical research to investigate what
information capital providers use, where and how this information is obtained and what additional information
capital providers would like to have. EFRAG and ICAS therefore commissioned the same research team to
undertake a large scale investor interview based study to address the following research questions:
• Does investors’ information acquisition objective, valuation or stewardship, affect the assessed relevance
of financial accounting information?
• Does the use of accounting information in compensation contracts affect investors’ assessments of the
representational faithfulness of financial accounting information?
• Do professional investors assess information presented in the income statement and statement of
financial position to be equally relevant and faithfully represented for the purposes of valuation and
stewardship?
• Does professional investors’ decision objective influence the importance of financial reporting information
relative to other information sources?
• Do professional investors’ assessments of corporate governance mechanisms influence their judgements
of the usefulness of financial reporting information and, if so, how?
4 This report presents the key findings of the research team’s empirical investigation into these questions. The
evidence is based on both quantitative and qualitative data obtained from a series of 81 face-to-face interviews
with professional investors based in 16 countries. In order to solicit investors’ assessments of decision usefulness,
the interviews were structured around a short fictional case containing abridged financial statement information
on a large private European manufacturing firm that holds a significant portion of financial investments.
The evidence of the research suggests that participants whose objective was to value the firm consistently
assessed financial accounting information to be more relevant than participants whose objective was to assess
the performance of the management. Subsequent analyses show that the latter result is potentially explained by
professional investors viewing overall corporate governance, and not single aspects of corporate governance,
as the key determinant of faithful representation. The findings indicate that investors view income statement line
items as more relevant than statement of financial position line items, especially if their assigned information
objective is to assess managerial performance.
The evidence strongly indicates that financial accounting information – regardless of its shortcomings – is seen
as a key input factor to professional investors’ decision-making. This finding is even more pronounced when
professional investors were asked to assess the performance of management. The evidence also strongly
confirms that accounting is not used in isolation, as professional investors place significant weight on alternative
information sources. These alternative information sources include qualitative and quantitative non-financial
information about the firm and its management, information about the industry and competitors, information
about product markets, and, to a lesser extent, information about corporate governance and the general macro-
economic situation. This information originates both from the firm’s management and information intermediaries
such as financial analysts and rating agencies.
Professional investors and the decision usefulness of financial reporting - EFRAG - ICAS Report
AUTHORS:
Stefano Cascino Professional investors and
Mark Clatworthy the decision usefulness of financial reporting
Beatriz García Osma
Joachim Gassen
Shahed Imam
Thomas Jeanjean
MARCH
2016
,amuri
Report prepared for ICAS (The Institute of Chartered Accountants of Scotland)
and EFRAG (European Financial Reporting Advisory Group)
by
Stefano Cascino (London School of Economics)
Mark Clatworthy (University of Bristol)
Beatriz García Osma (Universidad Carlos III de Madrid)
Joachim Gassen (Humboldt-Universität zu Berlin)
Shahed Imam (University of Warwick)
Thomas Jeanjean (ESSEC Business School, Paris)
© ICAS and EFRAG (2016)
This report is published for the Research Committee of ICAS and EFRAG.
The views expressed in this report are those of the authors and do not necessarily represent the views of
ICAS or EFRAG.
No responsibility for loss occasioned to any person acting or refraining from action as a result of any material
2 in this publication can be accepted by the authors or publishers.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted,
in any form or by any means, electronic, mechanical, photocopy, recording or otherwise, without prior
permission of the publishers.
Professional investors and the decision usefulness of financial reporting - EFRAG - ICAS Report
,amuri
Table of contents
Foreword 4
Acknowledgements 6
Executive summary 7
1. Introduction 12
2. Background and prior literature 14
3. Research methods and sample 19
4. Research findings 28
5. Summary and implications 56
Endnotes 60
References 62
Appendix 1: The instrument 66
3
Appendix 2: Additional analysis 71
About the authors 73
About ICAS 74
About EFRAG 75
Professional investors and the decision usefulness of financial reporting - EFRAG - ICAS Report
, amuri
Foreword
In 2013 ICAS and EFRAG published a literature review The use of information by capital providers. This review
was commissioned to provide independent evidence for the IASB’s standard setting process, in particular for
the revision of the Conceptual Framework. This work was undertaken by an exceptional team of international
academics, and we were pleased that they were given the opportunity to present the findings of their review to
the IASB members in early 2014.
The review highlighted the need for more research, particularly for new empirical research to investigate what
information capital providers use, where and how this information is obtained and what additional information
capital providers would like to have. EFRAG and ICAS therefore commissioned the same research team to
undertake a large scale investor interview based study to address the following research questions:
• Does investors’ information acquisition objective, valuation or stewardship, affect the assessed relevance
of financial accounting information?
• Does the use of accounting information in compensation contracts affect investors’ assessments of the
representational faithfulness of financial accounting information?
• Do professional investors assess information presented in the income statement and statement of
financial position to be equally relevant and faithfully represented for the purposes of valuation and
stewardship?
• Does professional investors’ decision objective influence the importance of financial reporting information
relative to other information sources?
• Do professional investors’ assessments of corporate governance mechanisms influence their judgements
of the usefulness of financial reporting information and, if so, how?
4 This report presents the key findings of the research team’s empirical investigation into these questions. The
evidence is based on both quantitative and qualitative data obtained from a series of 81 face-to-face interviews
with professional investors based in 16 countries. In order to solicit investors’ assessments of decision usefulness,
the interviews were structured around a short fictional case containing abridged financial statement information
on a large private European manufacturing firm that holds a significant portion of financial investments.
The evidence of the research suggests that participants whose objective was to value the firm consistently
assessed financial accounting information to be more relevant than participants whose objective was to assess
the performance of the management. Subsequent analyses show that the latter result is potentially explained by
professional investors viewing overall corporate governance, and not single aspects of corporate governance,
as the key determinant of faithful representation. The findings indicate that investors view income statement line
items as more relevant than statement of financial position line items, especially if their assigned information
objective is to assess managerial performance.
The evidence strongly indicates that financial accounting information – regardless of its shortcomings – is seen
as a key input factor to professional investors’ decision-making. This finding is even more pronounced when
professional investors were asked to assess the performance of management. The evidence also strongly
confirms that accounting is not used in isolation, as professional investors place significant weight on alternative
information sources. These alternative information sources include qualitative and quantitative non-financial
information about the firm and its management, information about the industry and competitors, information
about product markets, and, to a lesser extent, information about corporate governance and the general macro-
economic situation. This information originates both from the firm’s management and information intermediaries
such as financial analysts and rating agencies.
Professional investors and the decision usefulness of financial reporting - EFRAG - ICAS Report
