Are Stewardship and Valuation Usefulness Compatible or Alternative Objectives of Financial Accounting?

Abstract

Abstract:In their joint framework project, the FASB and the IASB recently proposed dropping stewardship as a separate objective of financial accounting, because the Boards view stewardship and valuation usefulness as compatible sub-objectives ranking under an overall objective of decision usefulness. This paper puts this conjecture to an empirical test. As it is widely agreed that asymmetric timely earnings increase the contractual efficiency of accounting information, I first test whether firms with more asymmetric timely earnings produce more valuation-useful financial accounting information. Second, I test whether firms with more influential non-equity stakeholders provide more valuation-useful financial accounting information. As non-equity stakeholders in general face higher transaction costs when diversifying unsystematic risk compared to equity stakeholders and as stewardship-related risks should be at least in part unsystematic, I expect the demand for stewardship-related accounting information to increase with the influence of non-equity stakeholders. Using a broad sample of U.S. firms and a set of firm-specific metrics for valuation usefulness based on short-window capital market reactions to quarterly earnings announcements, I document that the valuation usefulness of financial accounting information is consistently negatively related to its stewardshiporientation. I conclude from these analyses that valuation usefulness and stewardship are alternative objectives of financial accounting.

Soft Information and the Stewardship Value of Accounting Disclosure

“…This is consistent, e.g., with empirical evidence provided by Gassen (2008). Thus, abandoning stewardship as a separate objective of financial accounting and mandating further disclosure of soft information by standard setters and regulators can result in lower productivity and reduced firm value.…”

Discourses surrounding the evolution of the IASB/FASB Conceptual Framework: What they reveal about the “living law” of accounting

“…However, there is a surprising dearth of equivalent capital market research on the nature of, and the relationship between, stewardship and decision-usefulness. In terms of what capital markets research does exist, Gassen (2008) applies an innovative and carefully crafted research design to a large sample of US firms for the period 1990-2005 and concludes that, ''valuation usefulness and stewardship are alternative objectives of financial accounting'' (Gassen, 2008, p. 39); Wu and Zhang (2009) demonstrate that the stewardship demand for information has a significant influence on firms' accounting choices; and archival work by Bushman, Engel, and Smith (2006) also suggests that stewardship relevance is not subsumed by valuation relevance. 11 Ultimately, as the fundamental conceptual problems concerning decision-usefulness are beginning to garner increased attention (Ravenscroft & Williams, 2011; Table 1-vi), it would appear that there is an urgent need for additional work-from a variety of research perspectives-focusing on the nature of the overlap and interaction between the two objectives.…”

Decision Usefulness Approach to Financial Reporting: A Case for Employees

“…According to Gassen (2008), Financial Statement Forecasting is very important in the business sector for predicting the financial position and company can forecast the future events and providing them advantages over other competitors. The forecasting of the financial statements entails a comprehensive method and is a time consuming process.…”