ACADEMIC RESEARCH

Contribution to the development Of Accounting



Contribution to the development Of Accounting

Much of the modern academic literature in financial accounting grew from a seminal study by Ball & Brown of the impact of financial accounting data upon investors' beliefs. Focussing on the information content of financial accounting statements, they used econometric techniques to explore the relationship between unexpected changes in earnings disclosed in companies' annual reports and changes in share prices. A significant positive association emerged between the sign of the earnings change and the sign of the share price change; and within the framework of the efficient market hypothesis this was interpreted as an indicator of the value to investors of the accounting information (Ball 1968, 159-78).

The subsequent explosion of econometric work refining and extending the Ball & Brown approach is skilfully surveyed in Foster. Not only were more sensitive tests devised but also a whole array of further questions could be tackled. Foster reports the new evidence, as well as providing an encyclopaedic and balanced review of the literature on the use of financial statements in many other contexts. These include, for example, predicting business failure and evaluating the effects of merger. Foster's book was out of date before it was published, so fast has this literature been growing; but it remains invaluable in providing a framework within which the new literature can be assessed (Foster 1986, 10 - 23).

The rapid shift in the focus of financial accounting charted by Beaver, from ex post stewardship to ex ante informing of investment decisions, has been checked in recent years (Beaver 1998, 23 - 40). This is partly because of developments in principal-agent theory: shareholders look to financial accounting to relieve the problem of information asymmetry that underlies the principal-agent problem. Financial accounting also informs the market for corporate ...