Professional investors and the decision usefulness of financial reporting

A recent review of the academic literature for ICAS and EFRAG (Cascino et al., 2013) concluded that there are two main roles for financial reporting.

The first is to provide information for estimating the future cash flows associated with both debt and equity capital, often referred to as the valuation role. The second is the stewardship role, where financial reporting information is used in the preservation of investors’ capital and in the control and incentivisation of managers.

The downgrading of stewardship as a primary objective in the joint 2010 International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) Conceptual Framework for Financial Reporting generated significant debate and disquiet in the professional, regulatory and academic accounting communities. Despite the significance of this debate, the 2013 ICAS and EFRAG sponsored review of the literature showed that there is a lack of direct empirical evidence on the stewardship role and whether it requires information with different properties to that required for estimating future cash flows.

This report aims to address this gap by providing empirical evidence on professional investors’ assessments of the usefulness of financial reporting information for both valuation and stewardship decisions. Evidence-based research on the decision usefulness of financial reporting information is particularly timely, given the current developments of the IASB Conceptual Framework for Financial Reporting.