Is Financial Reporting Still Useful? Australian Evidence

36 Pages Posted: 22 Mar 2019

See all articles by Michael J Davern

Michael J Davern

The University of Melbourne - Department of Accounting; University of Melbourne

Nikole Gyles

University of Melbourne - Department of Accounting and Business Information Systems

Dean Hanlon

Monash University - Department of Accounting

Matt Pinnuck

University of Melbourne - Department of Accounting and Business Information Systems

Date Written: March 2019

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.

Keywords: Equity investors, Investor decision making, Mixed methods, Value relevance

Suggested Citation

Davern, Michael J. and Gyles, Nikole and Hanlon, Dean and Pinnuck, Matthew, Is Financial Reporting Still Useful? Australian Evidence (March 2019). Abacus, Vol. 55, Issue 1, pp. 237-272, 2019, Available at SSRN: https://ssrn.com/abstract=3358531 or http://dx.doi.org/10.1111/abac.12152

Michael J. Davern (Contact Author)

The University of Melbourne - Department of Accounting ( email )

Victoria
Melbourne, 3010
Australia

University of Melbourne ( email )

Victoria
Melbourne, 3010
Australia

Nikole Gyles

University of Melbourne - Department of Accounting and Business Information Systems ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia

Dean Hanlon

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Matthew Pinnuck

University of Melbourne - Department of Accounting and Business Information Systems ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia

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