Is Financial Reporting Still Useful? Australian Evidence

Michael J. Davern · Nikole Gyles · Dean Hanlon · Matt Pinnuck

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Financial Reporting and XBRL

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.

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References

2011Case study research: design and methods 2007Theory Building From Cases: Opportunities And Challenges 2000Determining Sample Size 1999The Boundaries of Financial Reporting and How to Extend Them 1999Have Financial Statements Lost Their Relevance?1997Changes in the value-relevance of earnings and book values over the past forty years 2016Mastering the Semi-Structured Interview and Beyond 2010Designing interviews to generate rich data for information systems research

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