Determining The Importance Level Of Accounting Information For Investors’ Decision Making
Warren Buffett: If You Own A Good Business, Keep It
Istanbul University – School of Business – Department of Quantitative Techniques
February 18, 2016
Int. Journal of Academic Research in Business and Social Sciences (IJARBSS), vol.6, no.2, pp.136-152, 2016
The aim of this study was to determine the precedence order of the accounting information (factors) influencing choice of investment, to derive the relative weight of each factor and to identify differences and similarities in such factors between accounting experts and finance experts. Analytical Hierarchy Process (AHP) methodology was used for the outranking of accounting information (Baker & Haslem, 1973) including future economic outlook of the company, quality of management, future economic outlook of the industry in which the firm is a part, expected future growth in sales, financial strength of the company, expected future percentage growth in the company’s earnings per share, reputation of the company, rate of return the company earn on its assets, ease with which the company can sell its assets in case of failure, size of the company, expected future level of long-term interest rate on corporate bonds, value of a share of stock based on the company’s accounting records (book value) etc. The questionnaires were answered by accounting and finance experts. In this study, subjective opinions of accounting and finance experts turn into quantitative form with Analytic Hierarchy Process. Results of this study can be used by investors, Ministry of Economy, finance, accounting, business and economy students, professionals and academicians etc.
Determining The Importance Level Of Accounting Information For Investors’ Decision Making – Introduction
The purpose of accounting is to provide useful information for making economic decisions. Users of accounting information can be internal or external to the companies. Investors are the external users of accounting information. Decision making is the process of selecting a logical choice from different alternatives. During the decision process about the investment, investors want to make sure that they are making a reasonable investment before transferring any financial resources to the company, so accounting information is needed during this period. The accounting information can be taken from company’s accounting information system.
Knowing all accounting information about the company isn’t needed for the investors. Dividing the accounting information to main and sub parts can be easier for investors’ decision making. Determining the importance level of main information (factors) and sub-information (sub-factors) helps the investors during the investment.
As investors, accounting and finance experts’ thoughts may be different about the precedence order of the accounting information (factors). Two sides which are accounting and finance can have different opinions during the investment decision according to their field. So, by using the results of this study, it is not possible to make general statements about the importance level of accounting information for investors’ decision making, but it is possible to find out the similarities and differences of the experts in such factors.
The purpose of this study is to find out the precedence order of accounting information for investors’ decision making. In this study, the relative weight of sub-information is also analyzed for determining the importance level. And also, this study finds out differences and similarities between accounting experts and finance experts about the importance of main accounting information (factors) and sub-accounting information (sub-factors).
The remainder of this study has been organized as follows: In section 2, the literature review of subjects covered in this study is given. In section 3, the methodology of the study which is AHP is explained. Section 4 presents our model and results. In section 5, we conclude with a summary of our results, and future research suggestions.
Baker, and Haslem’s (1973) study focused on reporting and interpreting the information needs of individual investors, and also identifies important sources of information used by investors used by investors in their analyses of common stock. They conducted a survey to the common-stock investors about information needs of individual investors by using a pretested questionnaire including 33 factors used in investment analysis and selected socio-economic variables. The respondents were given the answers according to the relative importance of each factor on a five-point scale. The average (arithmetic mean) was calculated to provide a single figure which summarizes the responses and serves as a basis for comparing the degree of importance the respondents attribute to each factor. The coefficient of variation was also calculated, which is a measure which relates diversity of response to the average response. The findings of the study show that investors make their decisions based primarily on future expectations, they were also interested in historical factors. Future economic outlook of the company, quality of management, and future economic outlook of the industry are in which the firm is a part are the factors of great importance Also, the results show that more meaningful information than that provided by profit forecasts or current financial statements is needed by investors in their analyses of common stock. It is not possible to make general statements about the needs of all investors by using the results of this study.
Nagy, and Obenberger (1994) examined the factors influencing the equity selection process of individual investors. 34 factors which were collected were taken from a questionnaire sent to a random sample of individual equity investors with substantial holdings in Fortune 500 firms reveal that individuals base their stock purchase decisions on classical wealth-maximization criteria combined with diverse other variables. First, they focused on determining the relative importance of the variables to individuals making investment decisions. They ranked the variables according to how frequently they were placed in each response category. They found that classical wealth-maximization criteria such as expected earnings, diversification needs, and minimizing risk are the most important variables for investors, even though investors employ diverse criteria when choosing stocks. Second, they used factor analysis to examine how the factors interacted. As a result, the factors were grouped into seven summary factors that capture major investor considerations.
Murphy, and Soutar (2004) presented a study that uses a conjoint analysis approach to investigate the attributes that influence individual investors when they make a decision to buy shares. The results show that financial measures, such as dividend, price-earnings ratio and yield are less important to individual investors than are a stock’s recent price movements, the nature of stock, and, in particular, the investors’ perceptions of the company’s management.
Martin (1971) provided a test of the decision-relevance of accounting information reported to holders (or prospective holders) of common stock equities through published financial statements (annual reports). A regression model, the Accounting Model, was employed to test the decision-relevance of particular annual report accounting variables. The model results provide support for the utility of accounting information. The study uniquely provides an explicit test of the usefulness of a series of accounting variables taken together.
Luminita (2014) presented data as a whole for everyone and from where each consumer of information can extract only the part they are interested in. and which is useful for them. The interests of users of accounting information regarding the interest, the need for information and the decisions they make as a result of the information received and also of the accounting model used by the entity from which the information is expected are also examined in this study. Descriptive method of research is used. It is found that the user of accounting information will look carefully both financial information and non-financial ones, will choose the direction to follow.
Table 5. Precedence order and the weights of the information
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