U.K. managers' decisions and their perceptions of capital markets

Abstract

This article discusses and presents some empirical evidence on a particular aspect of the “economic consequences” of accounting. It considers whether U.K. managers' perceptions of the attitudes of the capital market to reported earnings are likely to influence defined spending decisions of publicly quoted companies. This issue should be of interest to standard setters, financial managers, investors, and most users of financial statements. The fundamental hypothesis is that managers' spending decisions are affected by their perceptions of the extent to which the capital markets rely on reported earnings when valuing shares. The importance of testing the above hypothesis stems from the possibility that the decisions of managers may, on occasions, be driven by their expectations of the market's use of short-term prospective earnings, rather than by more fundamental economic factors. An analysis of the results from a large-scale postal questionnaire of U.K. finance directors is presented. The conclusions from the study support the stated fundamental hypothesis.