Who Uses Financial Reports and for What Purpose? Evidence from Capital Providers

Abstract

We review the academic literature on the use of financial reporting information by capital providers. We classify our findings by investor type and by information objective. While most capital providers use accounting information, our survey indicates that they do so in a variety of ways with financial reporting information competing with other sources of information. We also find that information intermediaries are influential in both credit and equity markets, making the identification of a typical target ‘user’ inherently difficult. Our main findings question the underlying objective of the Conceptual Framework to guide the development of standards for general-purpose financial statements to provide a typical knowledgeable investor with a true and fair view about the reporting entity. Finally, we identify gaps in the literature and suggest areas where future research can help inform important academic and policy debates.

Acknowledgements

This paper draws on the report ‘The Use of Information by Capital Providers’, prepared for ICAS (The Institute of Chartered Accountants of Scotland) and EFRAG (European Financial Reporting Advisory Group), by the same authors. We gratefully acknowledge the financial support and guidance of ICAS and EFRAG. Beatriz García acknowledges financial support by the AECA Chair in Accounting and Auditing and the UAM-Auditores Madrid Chair. We are also grateful for the helpful comments of the editor and an anonymous reviewer.

Notes

¹ Research published in leading international accounting journals is sometimes perceived as technically sound, but relatively insular (Demski, 2007; Basu, 2012), focusing on narrow issues for where data availability is good, but where relevance for central accounting questions is low.

² The major issues include definition of assets and liabilities, recognition and derecognition, the distinction between equity and liabilities, measurement, presentation and disclosure, and other comprehensive income.

³ In particular, our search extended to studies published in French, German, Italian and Spanish.

⁴ Some studies illustrate this difference via comparisons with options, noting that shareholders' claims are analogous to a call option on the value of the firm's assets, with an exercise price equal to the face value of debt (Beaver et al., 2010; Kothari et al., 2010).

⁵ The IASB (2010) was particularly concerned about the translation of stewardship into other languages (BC1.28).

⁶ Such an interpretation is not universal, however. See Scott (2011) for an alternative view where stewardship is not subsumed within decision usefulness.

⁷ See Armstrong et al. (2010), Shivakumar (2013) and Taylor (2013) for thorough reviews of the literature in this area.

⁸ Armstrong et al. (2010) provide an excellent summary of this literature.