Financial Reporting and Stock
Financial Reporting and Stock Price Movements The relationship between financial reporting numbers and stock price movement is an important one to anyone studying accounting. We spend four years learning the ins and outs of financial reporting so that some day we can get a job to prepare or audit the financial statements. Do these statements and the numbers that are in them actually affect shareholder value and if so then to what extent? Studies show that earnings do have an affect on stock price. That fact leads us to consider how managers can use GAAP to manipulate those earnings. Open up any intermediate accounting textbook, flip to chapter one and you e bound to come upon the section dealing with the principal users of financial statements. Investors and creditors are the individuals for which financial reporting exists to give information. It not enough to provide them just with financial statements, but information that is useful for decision making. We use the term ecision usefulness quite often but if you were to ask most people what that really means they wouldn be able to define it well enough for a serious discussion. Information has decision usefulness if it has predictive and feedback value. In other words, it
Financial reporting is the most important and widely distributed information source for anyone having anything to do with the stock market (and therefore stock prices). One could gather that an accounting practice is legitimate if it adheres to GAAP in substance and is applied consistently over time. Also, technological innovation like the internet and information technology have reduced transactions cost for trading allowing for increased speculation. These analysts and investors don really have any quantitative measures other than what the accounting reports give them. anagers in Public Firms Use Earnings to Influence Short-run Stock Prics. Numerous empirical studies show that the earnings figure at the bottom of the income statement has a direct impact on stock price. These are just a few of many gimmicks that are at the disposal of the accountant and CFO. What we have instead is a complete negation of financial reporting theoretical goal. As 2003 came to a close, companies in the S&P 500-stock index were on track to post a 20%-plus rise in stock price and a near-20% increase in earnings (added to show a correlation). Empirical research suggests that there is a positive correlation between stock price movement and earnings. This brings up an interesting discussion point, hen is smart accounting for resources and performance considered manipulation/distortion? Where do we draw the line? GAAP does leave some room open for the accountant interpretation. We have examined why financial accounting data exists and how well it accomplishes its conceptual goals. For example, firms claim in-process research and development instead of showing goodwill when little to none was reported previously by the purchased company. Works CitedDucharme, Larry L.
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