The Book in a Nutshell

The Fading Usefulness of Investors' Information

Corporate financial reports—balance sheets, income and cash flow statements, as well as the numerous explanatory footnotes in quarterly and annual reports and IPO prospectuses—form the most ubiquitous source of information for investment and credit decisions. Many stocks and bonds investors, individuals and institutions, as well as lenders to business enterprises look for financial report information to guide them where and when to invest or lend. Major corporate decisions, such as business restructuring or mergers & acquisitions, are also predicated on financial report indicators of profitability and solvency. Responding to such widespread demand, the supply of corporate financial information, tightly regulated all over the world, keeps expanding in scope and complexity. Who would have imagined, for example, that the accounting rules determining when a sale of a product should be recorded as revenue in the income statement would extend over 700 (!) pages?1 Eat your heart out, IRS. Its complexity notwithstanding, financial information is widely believed to move markets and businesses. But does it?

Like a Consumer Reports evaluation, we examine in the first part of this book the usefulness of financial (accounting) information to investors and, regrettably, provide an unsatisfactory report, to put it mildly. Based on a comprehensive, large-sample empirical analysis, spanning the past half century, we document ...

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