Earnings Presentation Effects on Manager Reporting Choices and Investor: Financial Accounting Theory Research Paper, NUS, Singapore

Earnings presentation effects on manager reporting choices and investor decisions

1. Introduction

The important roles of earnings information in capital markets and contracting have been recognized in the literature for many years. Earnings information is disseminated through a variety of channels including the primary financial statements, account-level, and segment-related disaggregation in the notes to the financial statements, and narratives in the notes, MD&A, and press releases. Indeed, much of the information content of earnings is communicated by management before the full financial statements and notes are released.

2. Mechanisms through which presentation attributes can affect users

We suggest three mechanisms through which presentation attributes can affect user behavior:

• Presentation attributes can directly affect information content.
• Presentation attributes can indirectly affect information content through their effects on managers’ real or reporting actions.
• Presentation attributes can affect ease or manner of processing.

3. Dimensions of the earnings presentation

In this section, we discuss the literature related to the primary earnings presentation attributes that have been examined. In particular, we discuss the literature related to three earnings presentation attributes: (1) disaggregation (vertical and horizontal), (2) location (recognition vs. disclosure; which statement for recognized items; and within statement classification, labeling, and subtotals), and (3) narrative attributes (location of key amounts within narratives, readability, medium, and timing of disclosure). We discuss research on disaggregation first because this attribute can directly affect the amount of information presented in significant ways. For each attribute, we briefly summarize studies of their effects on managers. Then we discuss studies of the effects of presentation on investor evaluations/pricing and other stakeholders.

Question:

Critically discuss how the presentation of financial information can influence user behavior?