Is Financial Reporting Still Useful? Australian Evidence

Abstract

There has been recent and growing criticism of the usefulness of financial reporting for investors, particularly the annual financial statements. In response, the IASB is pursuing several projects aimed at improving the relevance of financial information. To inform the IASB's work, we investigate, using a mixed-method approach, the extent and nature of the use of annual financial statements by equity investors. We examine the relevance of financial reporting for equity valuation in Australia across time. We find that financial reporting (specifically, reported net income, shareholders' equity, and operating cash flows) remains relevant for investment decisions. We further support this finding with evidence from field interviews that provide insight into how and why financial statements are used by equity investors. The field evidence also demonstrates that no one financial statement dominates in investor decision making. Given the increasing availability of more timely, forward-looking information from alternative sources, we examine the relevance of non-GAAP financial information and other non-financial information for investor decision making. We find that non-GAAP financial information (as proxied by EBIT and EBITDA) is more value relevant than statutory measures. We further find a broad range of non-financial information is utilized by investors in making investment decisions both as a 'screen' and for valuation purposes. Our findings inform regulators and other stakeholders as we provide evidence of the continuing relevance of financial statements and the complementary role of non-GAAP financial and other information. Our evidence provides a rebuttal to the recent criticism.

Impact of tangible book value and operating earnings on firm value variants in South Africa

“…On the one hand, the results converge with Davern et al (2019) who found out that EBIT and EBITDA possess information that helps explain the movement in equity prices in Australia. On the other hand, they also conflict with the same study regarding information content of book value.…”

“…The current investigation established that TBV lacks value relevance, whilst Davern et al (2019) say BV is value relevant.…”

“…Value relevance of EBIT (amongst other variables) is the subject of a study by Davern et al (2019). The study sought to determine whether or not investors still use year-end financial statements in equity valuation in Australia.…”

Financial Reporting by Charities: Why Do Some Choose to Report Under a More Extensive Reporting Framework?

“…Therefore, we use organizational size factors to measure the economic and/or political importance of the charity. Empirical research has shown a significant organizational size effect on the demand for financial information and the credibility of that information (Allee and Yohn, 2009; Davern et al ., 2019). A positive relationship has also been found between size/economic importance of the entity and the level of voluntary disclosure (Brown et al ., 1999; Eng and Mak, 2003; Bhojraj et al ., 2004; Behn et al ., 2010).…”

The impact of textual characteristics of management letters on stock prices of Russian companies

“…Роль нефинансовой информации в анализе потенциала компании в последние годы продолжает возрастать. Это происходит из-за того, что полезность финансовой отчетности снижается и инвесторы нередко считают ее практически ненужной для принятия инвестиционных решений [Davern, 2019]. Учитывая отсутствие общей теоретической основы, в литературе, как правило, подчеркивается значимость детерминант нефинансовой отчетности с использованием социально-политических и экономических теорий.…”