Demand for Stocks and Accounting Information

43 Pages Posted: 2 Feb 2022

See all articles by Charles McClure

Charles McClure

University of Chicago Booth School of Business

Valeri V. Nikolaev

University of Chicago Booth School of Business

Date Written: February 1, 2022

Abstract

Although the primary objective of financial reporting is to provide decision-useful information to investors, to date, we have limited large-scale evidence linking accounting information and investors’ decisions. We introduce and study the demand relevance of accounting information for equity investment decisions. More specifically, drawing on the recent asset-pricing literature, we use investors’ portfolio choices to infer the relevance of accounting information for the demand for stocks. We show that (1) the aggregate demand for a given stock is more sensitive to operating profitability than gross profit or “bottom line” earnings, (2) significant heterogeneity exists in the demand relevance of income-statement components, (3) investors decisions reveal preferences for accrual-based performance measures over cash-based measures, and (4) the relevance of accounting information varies depending on the investment objective.

Keywords: Demand relevance, portfolio decisions, accruals, earnings, demand for stocks, heterogeneity

JEL Classification: G10, G18, M40, M41, M44, M45

Suggested Citation

McClure, Charles and Nikolaev, Valeri V., Demand for Stocks and Accounting Information (February 1, 2022). Chicago Booth Research Paper No. 22-06, Available at SSRN: https://ssrn.com/abstract=4023542 or http://dx.doi.org/10.2139/ssrn.4023542

Charles McClure (Contact Author)

University of Chicago Booth School of Business ( email )

7737024885 (Phone)

Valeri V. Nikolaev

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

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