The Network Structure within the Financial Statements: An Exploratory Study Using Eye-Tracking Through the Lens of Network Theory

Abstract

Value relevance literature suggests that investors are primarily interested in earnings information that can help investors assess equity value. Thus far, most researchers have concentrated on the aggregate level in the relationships between information in the financial statements and the value of the firm. This paper advances the study by exploring what financial statements items that have value relevance to individuals. We examine the value relevance by using the financial statement users’ visual attention data. We ground our model on network theory and employ the eye-tracking technique to examine the centrality of financial statements items. Compare to previous value relevance studies; our method employs a more direct way of investigating the relationship between the financial statement items and the investment decision. We find that most earnings items are the “celebrity actors” or the nodes of individuals’ attention that are relevant to individuals’ investment decision. Our findings corroborate the FASB statement that financial items are interrelated and should not be used independently. We provide new evidence for FASB and IASB to continue their joint project on restructuring the financial statements.

Keywords: investors’ attention, value relevance, eye tracking, network theory

JEL Classification: M41; G12; C9; C89