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The Quality of Financial Statements: Perspectives from the Recent Stock Market Bubble

44 Pages Posted: 17 Aug 2002  

Stephen H. Penman

Columbia Business School - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: Undated

Abstract

During the recent stock market bubble, the traditional financial reporting model was assailed as a backward looking system, out of date in the Information Age. With the bursting of the bubble, the quality of financial reporting is again under scrutiny, but now for not adhering to traditional principles of sound earnings measurement, asset and liability recognition. This paper is a retrospective on the quality of financial reporting during the 1990s. Did reporting under U.S. GAAP perform well during the bubble, or is its quality suspect? My premise is that financial reporting should serve as an anchor during bubbles, to check speculative beliefs. With a focus on the shareholder as customer, the paper asks whether shareholders were well served or whether financial reporting helped to pyramid earnings and stock prices. The scorecard is mixed. A number of quality features of accounting are identified. Inevitable imperfections due to measurement difficulties are recognized, as a quality warning to analysts and investors. And a number of failures of GAAP and financial disclosures are identified which, if not recognized, can promote momentum investing and stock market bubbles.

Keywords: quality of earnings, financial reporting, stock market bubbles

JEL Classification: G14, M41

Suggested Citation

Penman, Stephen H., The Quality of Financial Statements: Perspectives from the Recent Stock Market Bubble (Undated). Available at SSRN: https://ssrn.com/abstract=319262 or http://dx.doi.org/10.2139/ssrn.319262

Stephen H. Penman (Contact Author)

Columbia Business School - Department of Accounting ( email )

3022 Broadway
New York, NY 10027
United States
212-854-9151 (Phone)
212-316-9219 (Fax)

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