Demand for Stocks and Accounting Information
43 Pages Posted: 2 Feb 2022
Date Written: February 1, 2022
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: Suggested Citation