Shareholder Use and Understanding of Financial Information

T. A. Lee, D.P. Tweedie

• Publisher: Routledge
• Year: 2020
• Print ISBN: 9780367517939
• eBook ISBN: 9781000167573
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book, first published in 1977 and reissued in 1990, examines one of the most familiar aspects of accountancy – that of company financial reporting. Assessing the view that shareholders have little time for financial reports, this book presents the findings from a research project analysing whether or not shareholders understand financial reports; what they do and don't understand; their use of financial reports; the type of shareholders who have the most, and least, understanding and who make most, and least, use of financial reports.

The Institutional Investor and Financial Information

THE INSTITUTIONAL INVESTOR
AND
FINANCIAL INFORMATION

A report sponsored by the Research Committee of
The Institute of Chartered Accountants in England and Wales

T. A. Lee

(Professor of Accountancy and Finance,
University of Edinburgh)

D. P. Tweedie

(Technical Director, The Institute of Chartered Accountants of Seotland, and Visiting Professor in the International Centre for Research in Accounting, University of Lancaster)

THE INSTITUTE OF CHARTERED ACCOUNTANTS
IN ENGLAND AND WALES
CHARTERED ACCOUNTANTS’ HALL, MOORGATE PLACE,
LONDON EC2P 2BJ
1981

This study is sponsored by the Research Committee of The Institute of Chartered Accountants in England and Wales and does not necesarily represent the views either of the Research Committee or of the Council of the Institute.

No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or publisher.

© 1981 T. A. Lee and D. P. Tweedie

ISBN 0 85291 301 X

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.

Alsace Print-Production Ltd., London, SW1

Contents

Preface and Acknowledgements

1 Introduction

Identifying the ‘sophisticated’ investor

How important is the ‘sophisticated’ investor?

2 Research Methodology and Survey Respondents

The sample

The survey response

The interviews

Background factors

Respondents’ sex

Number of shareholdings in portfolio

Value of portfolio

Final say in investment decision making

Experience of institutional investment

Experience of using accounting information

Accounting training

Summary of background factors

Respondents and non-respondents

Approach to analysis

3 Understanding Financial Information

Assessing actual understanding

Perceived understanding of respondents

4 Assessing Actual Understanding of Traditional Financial Information

General nature of reporting

Nature of financial statements

Accounting terminology

Accounting valuation bases

Financial ratios

Summary

5 Further Assessment of Actual Understanding of Financial Information

Understanding scores

Constructing the index of understanding

The index of understanding

Perceived relevance and actual understanding

Summary

6 Assessment of Actual Understanding of Inflation Accounting

Nature of inflation accounting statements

Inflation accounting terminology

CCA valuation bases

Understanding scores

Constructing the index of understanding

Perceived relevance and actual understanding

Summary

7 Respondents’ Views on the Use Made of Financial Information in Their Organisations

Useful financial information

The use of external financial advisers

Information analysis

Forecasting of results

Summary

8 Individual Respondents’ Use and Assessment of the Annual Report

Respondents’ reading of the annual report

Perceived importance of sections of the annual report

Useful information in annual reports

Reading pattern of the individual respondent

Supplementary inflation accounting statements

Summary

9 Individual Respondents’ Use of Other Sources of Information

Use of other sources of financial information

Perceived importance of other sources of financial information

Use of all sources of published information

Useful information found in published sources other than the annual report

Summary

10 Respondents’ Views on Company Visits

Companies visited by respondents’ organisations

The objectives of company visits

Perceived importance of company visits

Summary

11 Understanding, Rending Behaviour and Respondents’ Background

Readership and understanding

Understanding, readership and type of respondent

Understanding, readership and shareholdings

Understanding, readership and portfolio valuation

Understanding, readership and final say

Understanding, readership and investment experience

Understanding, readership and use experience

Understanding, readership and accounting experience

Summary

Understanding of inflation accounting and respondents’ background

Areas of misunderstanding of traditional reporting practice

12 Summary, Conclusions and Recommendations

Summary

Conclusions

Recommendations

13 Appendices

14 Bibliography

Preface and Acknowledgements

In 1974, we embarked on the task of obtaining evidence of the use and understanding of financial information by shareholders of limited companies. It appeared then to us that it was important to establish whether or not shareholders used available information (and, if so, to what extent); and also whether or not they had a reasonable understanding of such information. Seven years later, we are now in a position to report on the last major part of this project — that is, a study of the financial experts in the shareholder community; namely, institutional investors and stockbrokers.

The earlier parts of the project had concerned the individual private shareholder, and his use and understanding of available financial information (see the bibliography for a list of the relevant publications). In this respect, we believed it was desirable to separate the private shareholder from his professional counterpart and, consequently, this study examines in some depth the latter person. The main objectives are the same as in the previous studies — to evidence the degree to which corporate financial reports and other sources of financial information about companies are used and understood by investors — in this case, by ‘sophisticated’ investors. We have gathered together what we believe to be unique evidence in this respect, telling us much about the way in which the professional investment community processes financial information prior to making its investment decisions.

The areas covered in this study are similar to those examined in relation to the private shareholder — that is, shareholder understanding of various aspects of traditional financial reporting practice (including, inter alia, financial statements, accounting terminology and asset valuation); and use of corporate annual reports and other sources of financial information (including, inter alia, interim financial statements and press reports). However, the opportunity has also been taken to expand the coverage to include such matters as the role of company visits by institutional investors and stockbrokers; the nature of the financial analysis process utilised by them; and their use and understanding of inflation accounting statements. It was felt that such extensions to the previously tested areas of information use and analysis provided us with a reasonable coverage of the major matters of concern in the general area of financial information use and understanding.

As in the main private shareholder study, the research method was by means of an interview questionnaire which enabled suitable data to be gathered for further analysis. The latter activity contained a mixture of straightforward reporting of response aggregates, together with suitable cross-analyses of processed data with various background characteristics of the respondents. These cross-analyses were also aided by the use of composite data which distinguished different types of readers of corporate annual reports, and different levels of reader comprehension.

All the respondents in this study could be classified as financial experts as they we...

Table of contents

• Cover
• Half Title
• Original Title Page
• Original Copyright Page
• Title Page
• Copyright Page
• Acknowledgement
• Introduction
• The Private Shareholder and the Corporate Report
• The Institutional Investor and Financial Information