3 years ago

an investigation of the usefulness of accounting information for ...

an investigation of the usefulness of accounting information for ...

OVERVIEW This study

OVERVIEW This study mainly focuses on the usefulness of accounting information by financial analysts on different types of accounting disclosures from the perspective of listed members of the Financial Services Commission (FSC) of Mauritius. The significance of this study is derived from the key role played by both financial analysts and FSC in contributing towards economic development of Mauritius economy. Financial analysts together with the FSC have an indirect hand in lifting up the economic development of an economy locally. Financial analysts enhance the quality of investment decisions making by providing guidance and recommendations to main players such as investors in a financial market. They contribute towards market efficiency of capital markets such as the Stock Exchange of Mauritius. An efficient capital market acts as an engine for the economic development of a country and ensures sustainable growth on the long-term of the national economy. The Financial Services Commission was established under the Financial Services Development Act 2001. It provides a regulatory framework for the financial services in Mauritius and issues guidelines in line with international standards. The Commission monitors Financial Services Providers (FSP) which encompasses bodies for securities (Stock Exchange), insurance and global business. The FSC is particularly important for this study as the regulation set out is derived from the Companies Act 2001 and the list of accounting items is based on IAS 1- the Presentation of Financial Statements for Companies. All accounting information which is disclosed as per the requirement of IAS 1 is mandatory in nature. So by analysing the usefulness of this information, this study will be able to explain whether this mandatory information enables financial analysts to make better investment decisions or they are present in the financial statements only for the sake of regulatory compliance and not serving any purpose for decision making. The accounting information disclosed as per the requirement of IAS 1 is subdivided into six main categories namely: historical, forward-looking, quantitative, qualitative, mandatory and voluntary accounting information. The main reason behind selecting financial analysts for the study is explained by Ramnath Rock and Shane (2008). They stated that financial analysts’ activity mainly focused on forecasting of firms’ performance such as in earnings, cash flows and share prices. According to Beaver (2002), the importance of forecasting firms’ performance is to increase the speed of capital market investments decisions. A country’s economy relies on the speed of capital market investment decisions, that is, the faster these decisions are taken, the faster the economy will boost up. 2

LITERATURE According to IASB (2005), financial analysts are capital market intermediaries who improve market efficiency through information collection and dissemination and they are representatives of the investment community for which the reporting of corporate information is primarily intended. The SRI (1987) reported that analysts’ research reports are among the most influential sources for investment decision making. This argument is confirmed by Cottle et al. (1988) who stated that analysts attempt to present important facts in a manner that will be informative and useful to investors. Financial analysts do not simply rely on the information revealed in the financial statements but go beyond that. Literature also reveals that financial analysts in capital markets indicate play a valuable role in improving market efficiency. According to Barth and Hutton (2000), stock prices for firms with higher analyst following more rapidly incorporate information on accruals and cash flows than prices of less followed firms. Academic research on financial analysts also examines whether there is any relation between Management’s disclosure decisions and analyst decisions to cover firms. Bhushan (1989) and Lang and Lundholm (1993) argued that voluntary disclosure lowers the cost of information acquisition for analysts and hence increases their supply. Expanded disclosure potentially enables financial analysts to create valuable new information, thereby increasing demand for their services. However, public voluntary disclosure also pre-empts analysts’ ability to distribute managers’ private information to investors, leading to a decline in demand for their services. Various studies have been conducted in order to address the main issue on whether financial analysts use historical accounting information in their decision making process. Two main research approaches have been considered to assess value-relevance of accounting figures, namely, association studies and predictive studies. The association approach assumes market efficiency and thus considers share market price as the benchmark. The predictive approach relies on discovering accounting data that are not reflected in stock prices and thus predicts future stock price adjustments. According to Ou & Penman (1989), the existence of significant abnormal returns to a trading strategy that is based on the prediction of the sign of future changes in annual earnings per share (EPS). They conclude that fundamental analysis works in the sense that identifies equity values not currently reflected in stock prices and thus produces abnormal returns. However, Greig (1992) and Stober (1992) concluded that equity value measure predicts future returns because it proxies for expected returns not because it captures abnormal returns associated with stock price deviations from fundamental values. 3

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