How Important Are the Numbers?

Here’s an interesting study:

The deteriorating usefulness of financial report information and how to reverse it

Abstract

There is a wide-spread and growing dissatisfaction with the relevance and usefulness of financial report information, particularly among investors and corporate executives. The dissatisfaction is corroborated by extensive research which consistently documents a growing gap between capital market indicators and financial information, more so for reported earnings. The reported earnings of most firms no longer reflect enterprise performance. I trace the deterioration of the usefulness of financial information to: (1) the abandonment by accounting standard-setters of the traditional income statement (matching) model in favour of a balance sheet (asset valuation) model, and (2) standard-setters’ failure to adjust asset recognition rules to the fundamental shift in corporate value-creating resources from tangible to intangible assets. I conclude this paper with change proposals to restore the usefulness of financial information to investors.

Posted by Eddy Elfenbein on June 18th, 2020 at 10:33 am

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