44 Pages Posted: 17 Aug 2002
Date Written: Undated
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the recent stock market bubble, the traditional financial reporting model was assailed as a backward looking system, out of date in the Information Age.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: 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
By Ray Ball