Financial Reporting for Common Stock Investment Decisions

Abstract

In 1970, the National Association of Accountants published the results of a study consisting of a series of depth interviews conducted under the direction of Morton Backer.' These interviews represented an attempt to elicit information from securities analysts, loan officers of commerical banks, and corporate financial executives concerning the kinds of information required in the making of investment and credit decisions. The purpose of the study was to identify possible improvements in financial reporting by relating the responses of the interviewees to current reporting practices. The results of the study are highly significant for the accounting profession. The majority of interviewees, for example, expressed continued support for conservatism in accounting reports, and were most concerned about diversity in accounting procedures.2 Both securities analysts and commercial bankers, however, were strongly opposed to the recasting of financial statements to reflect general and specific price changes.3 The purpose of this article is to test the validity of analysts' opposition. The author will evaluate the outputs resulting from various reporting methods on the basis of their usefulness in valuing common stock and then compare the results of this evaluation with the responses of the interviewees participating in the NAA study. Hopefully, this last step will provide a basis