Professional investors and the decision usefulness of financial reporting by Stefano Cascino, Mark Clatworthy, Beatriz García Osma, Joachim Gassen, Shahed Imam, Thomas Jeanjean

Professional investors and the decision usefulness of financial reporting by Stefano Cascino, Mark Clatworthy, Beatriz García Osma, Joachim Gassen, Shahed Imam, Thomas Jeanjean

Chapter 1

INTRODUCTION

A 2013 review of the academic literature (Cascino et al., 2013) for ICAS and EFRAG concluded that fnancial 
reporting is generally regarded as performing two main roles. The frst can be described as a valuation or 
pricing role, where fnancial reporting is used in predicting future cash fows, typically to arrive at an estimate 
of the fundamental value of the frm or its debt and/or equity securities (Beyer et al., 2010). The second, usually 
labelled the stewardship or contracting role, is one involving control and accountability, where accounting 
information is employed in frms’ contracts, monitoring and governance processes, often with a view to 
preserving capital and infuencing future cash fows (e.g., Bushman and Smith, 2001; Lambert, 2001; 2010; 
Lennard, 2007). This typically takes place as part of assessments of managerial performance and accounting-

7eewwbased compensation arrangements.
In relegating the stewardship objective for fnancial reporting in their joint 2010 Conceptual Framework for 
Financial Reporting, the IASB and FASB reignited one of the most fundamental and enduring debates in 
accounting (see Murphy et al., 2013 for a discussion). The 2015 Exposure Draft of the IASB’s Conceptual 
Framework for Financial Reporting (Conceptual Framework Exposure Draft) devotes more attention to 
stewardship, though it is still not separately defned and remains a subset of a broader ‘decision usefulness’ 
objective. The decision usefulness objective is where information is designed to be useful for investment 
decisions, though these decisions are characterised as depending in part upon stewardship assessments. 
While some constituencies have been persuaded that a single decision usefulness objective for accounting 
can, at least to a reasonable extent, form the basis of a common set of standards that will satisfy most users 
of fnancial reporting information, others have argued that removing an emphasis on stewardship may have 
widespread economic implications (e.g., Kothari et al., 2010).
The Conceptual Framework Exposure Draft deliberations have also drawn attention to the relative importance 
of the statement of fnancial position (or balance sheet) as compared with the income statement.1
 The IASB 
emphasises the former via the elementary primacy given to assets and liabilities over income and expenses.2 
An increased focus on the balance sheet has resulted in heightened concerns over the increased use of 
fair values and changes in reported performance measures, in particular whether comprehensive income is 
prioritised over proft or loss as the primary measure of performance (e.g., Thinggaard et al., 2006; Dichev, 
2008; Whittington, 2008a).
The aim of this study is to provide empirical evidence to help inform these important debates. It frst investigates 
whether professional investors’ assessments of fnancial accounting information are shaped by their use of 
the information to value the frm or to assess the performance of management. While there are many areas 
where the two objectives overlap, prior research points to areas where each may require information with 
different properties to the other (Lambert, 1993; 2001; Armstrong et al., 2010). This research is discussed in 
more detail below.
According to the 2010 Conceptual Framework for Financial Reporting, relevance (information’s capability to 
infuence users’ decisions) and faithful representation (information that is complete, neutral and free from 
errors) are the two fundamental qualities that make information decision useful. In addition to examining how 
investors judge both the relevance and representational faithfulness of fnancial reporting information overall, 
this study examines assessments of various fnancial statement line items, together with alternative sources 
of information. Finally, it investigates investors’ assessments of the extent to which companies’ corporate 
governance mechanisms reduce perceived limitations of accounting data

The study involves a large-scale international face-to-face survey of professional investors, centred on a 
fctional case study designed to draw out patterns of information usage under valuation and stewardship 
conditions. The focus on professional investors refects their importance both as major providers of capital 
and as target users of fnancial reporting information (Cascino et al., 2013). The research uses both quantitative 
and qualitative data from the interview survey to address the following questions:
• Does investors’ information acquisition objective, valuation or stewardship, affect the assessed 
relevance of fnancial accounting information?
• Does the use of accounting information in compensation contracts affect investors’ assessments of the 
representational faithfulness of fnancial accounting information?
• Do professional investors assess information presented in the income statement and statement of 
fnancial position to be equally relevant and faithfully represented for the purposes of valuation and 
stewardship?
• Does professional investors’ decision objective infuence the importance of fnancial reporting 
information relative to other information sources?
• Do professional investors’ assessments of corporate governance mechanisms infuence their 
judgements of the usefulness of fnancial reporting information and, if so, how?
The next chapter of the report briefy outlines some of the academic literature on the relative importance of 
the valuation and stewardship objectives of fnancial reporting, the use of accounting and non-accounting 
information sources by professional investors and the importance of corporate governance. Chapter 3 presents 
the research design and methodology, followed by the results in Chapter 4. Finally, the report concludes with 
a summary and a discussion of the implications of the fndings for accounting standard setters, preparers and 
academic researchers.

Professional investors and the decision usefulness of financial reporting by Stefano Cascino, Mark Clatworthy, Beatriz García Osma, Joachim Gassen, Shahed Imam, Thomas Jeanjean