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7.14HOW ACCOUNTING INFORMATION IS USEFUL FOR INVESTORS?

ZarahPuspitaningtyas

Abstract

This study intended to apply the concept of value relevance of accounting information. The value relevance of

accounting information emphasizes on “how accounting information has a value relevant for market participants

(investors)?”. How investors react to the announcement of accounting information? These reactions will prove that the

content of accounting information is a very important issue in making investment decision.So, it can be said that

accounting information was useful for investors.

Analysis of this study used a qualitative approach. Datacollected using semi–structured interview method. Informant

was a security analyst who provides advocacy to investors who make stock investment in real estate and property

companies listed on Indonesia Stock Exchange (IDX), we used the snowball technique to determine informant. The

results indicate that accounting information gives meaning usefulness for investors. Therefore, this study’s findings add

strength of the concept of value relevance of accounting information and the usefulness of accounting information for

market participants (investors).

Keywords:value relevance of accounting information, useful of accounting information

Accounting information is obtained from the information content of financial statements through fundamental analysis.

Fundamental analysis aims to provide data related to the company required for investment decision-making process.

Investment decisions in question is the decision to buy, sell, or maintain ownership of the shares. The underlying

concept is that the stock value of a company is affected by financial performance of companies. Financial performance

reflected in the financial statements, and through analysis of historical financial statements will be able to understand

the strengths and weaknesses of the company, identify the direction and development, evaluate the operational

efficiency, as well as understand the nature and operation of the company (Lev, 1974:3; Foster, 1986:309;

Wignjohartojo, 1995:2; Weston and Copeland, 2010:231).

The concept of value relevance of accounting information and the concept of decision usefulness of accounting

information are interrelated. The value relevance of accounting information emphasizes on “how accounting

information has a value relevance for market participants (investors)?” (Beaver, 1968). Whereas, the concept of

decision usefulness of accounting information emphasizes on “how financial statements can be more useful?” The

consequences of this concept is that the accounting information contained in financial statements should provide the

usefulness to users in terms of decision making (Scott, 2009:59). The concept of value relevance of accounting

information to explain about how investors react to the announcement of accounting information. These reactions will

prove that the content of accounting information is a very important issue in making investment decision. So, it can be

said that accounting information was useful for investors.

Many empirical studies of accounting have been trying to find the value relevance of accounting information in order to

enhance financial statement analysis. The relevance of accounting information value is a concept that addresses a

variety of meanings and measures relating to accounting. Information predicted has value relevance of accounting,

because the accounting information is statistically associated with the stock market value (Easton and Harris, 1991; Ali,

1994; Barth et al. 2001; Kothari, 2001; Beaver, 2002; Cao, 2005; Hand, 2005; Rahmawati, 2005; Gallizo and Salvador,

2006; Ragab and Omran, 2006; Liu and Liu, 2007; Tan and Lim, 2007; Vishnani and Shah, 2008; Oyerinde, 2009; So

and Smith, 2009).

However, several previous studies have attempted to explain the relationship of accounting information and market

values using analysis of multiple linear regression indicate that the coefficient of determination (R2) is relatively small.

It is implies that the ability of accounting information in explaining variations of market values is relatively small. Such

studies by Belkaoui (1978) indicate R2 of 34.1%, Dhingra (1982) indicate R2 of 13%, Farrelly et al. (1985) indicate R2

of 66%, Chun and Ramasamy (1989) indicate R2 of 22%, Tandelilin (1997) indicate R2 of 15.78%, and Puspitaningtyas

(2006, 2011) indicate R2 of 12.6% and 24.8%. Intended accounting information is the accounting variables are

measured based on the information contained in financial statements that reflect the quality of management

performance, such information include current ratio, debt equity ratio, return on investment, and so on. Then, what is it

implies that the accounting information has no value relevance for market participants? So, the accounting information

will be said that have not be useful for investors? This problem which we will describe in this study, is that how

accounting information is useful for investors?

INTRODUCTION

Value Relevance of Accounting Information

Beaver (1968) provides the definition of value relevance of accounting information as the ability to explain a companys

value based on accounting information. The relevance value is directed to investigate the empirical relationship between

value of stock market and accounting that are intended to assess the usefulness of these accounting values in the

assessment of company fundamentals. Beaver examines the reaction of trading volume, which explains empirically

about how investors react to earnings announcement. Beaver finding an increase in volume dramatically over the past

week around the earnings announcement date. These reactions also occur in the stock price. The research results proved

LITERATURE REVIEW

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that the content of accounting information is a very important issue and an important consideration in making

investment decision.

Ball and Brown (1968) prove that the accounting information is useful for investors to estimate the expected return and

risk of securities. If the accounting information does not contain the information, then there will be no revision of belief

after the receipt of information, so it does not cause the decision to buy or sell. Thus, the information will be useful if it

causes investors change their beliefs and actions.

There are four approaches to understanding the value relevance of accounting information (Francis and Schipper, 1999),

consist of: (1) approach to fundamental analysis, said that the accounting information causes changes in market prices

and stock prices detect the occurrence of irregularities, (2) approach to prediction, said that the accounting information

relevant if it is useful to predict the future performance, (3) approach of the value relevance of information embodiment,

said that the accounting information relevance to investors when they are used to determine stock prices. This approach

implies that the relevance of the value measured by the market reaction to new information, and (4) approach to

measuring the relevant value, said that value relevance of accounting information contained in financial statements is

measured by its ability to capture or summarize the information business and other activities.

The investment value of the shares affected investor perceptions about the future performance. Stock value will rise if

investors predict the performance to be achieved the company will increase, and vice versa. Assessment of investors

against the companys prospects in the future can be obtained if the investor has information related to the company

(Sumarni and Rahmawati, 2007). Thus, accounting information contained in financial statements is one factor that can

influence the formation of investor perceptions of the quality of corporate management as well as one of the

information to revise and detect the value of the stock.

Information Usefulness

Information is evidence which has the potential to affect an individual’s decision (Scott, 2009:68). Each individual does

not always indicate the same reaction to the same information (Kim and Verrecchia, 1997). It is important to understand

why the accounting information contained in financial statements is useful. The main objective of financial accounting

is to present information that is useful for the users in decision making (Day, 1986; Beaver, 1989:22). In this case,

investors require as a basis of analysis of accounting information for investment decisions. Accounting information is

complete, accurate and timely provide the opportunity for investors to make decisions rationally so to achieve results as

expected (Gniewosz, 1990; Bamber et al. 1997; Lawrence and Kercsmar, 1999; Sembiring, 2005; Landsman, 2007;

Suwarjono, 2008:167; Scott, 2009:9).

Decision Usefulness Approach of Accounting Information

Decision usefulness approach of accounting information is an approach to the financial statements based on historical

costs to become more useful. This approach focuses on the users of financial statements, their decision, the information

they need, as well as their ability to process accounting information (Wignjohartojo, 1995:41).

The purpose financial statements is to provide information relating to financial position, performance, and changes in

financial position of an enterprise that is useful for users in making economic decisions. However, the financial

statements do not provide any information that may be required of users in making economic decisions, because in

generally describe the influence of financial and events in the past. Therefore, in order to make economic decisions, the

users of financial statements require an evaluation or analysis based on accounting information contained in financial

statements (Moon and Keasey, 1992; Banker et al. 1993; Eccles and Holt, 2005; Alattar and Al-Khater. 2007; Standar

Akuntansi Keuangan, 2009:3).

A capabilities of financial statements to provide accounting information useful for investors is inseparable from the

problem of the qualitative characteristics of financial statements, that is relevance and reliability, to make accounting

information contained in financial statements to be useful. Relevant information is information that has the capacity to

influence investor beliefs about the expected future return, and should be released in a timeliness. Reliable information

is information that is accurately and free from bias. That is, the information must be verifiability, neutrality, and

representational faithfulness (FASB, 1980; Eccles and Holt, 2005; Maines and Wahlen, 2006; Standar Akuntansi

Keuangan, 2009:5-9; Scott, 2009:76).

Analysis of this study used a qualitative approach, we used semi–structured interview method for collecting data.

Informant was a security analyst who provides advocacy to investors who make stock investment in real estate and

property companies listed on IDX. The underlying assumption is that the investor or his advisor (securities analyst) as

individual users of accounting information contained in financial statements that will take investment decisions by

performing fundamental analysis. One of the essential information required in fundamental analysis is accounting

information contained in the companys financial statements.

Selection of informants using snowball technique, which is initially determined one key informant, later determined

4 informants based on the recommendation of the key person so that the informant amounted to 5 people. If the answer

from informants is the same (homogeneous), dont do selection of informan again. And vice versa, up to obtain the same

answer (homogeneous) of all informants.

RESEARCH METHOD

DISCUSSION

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The results of interviews with the informants indicate that accounting information as a result of fundamental

analysis is an important consideration for investors, the goal is to predict the future stock value. When giving

advocation to investors, analysts who become informants in this study stated that the ever present consideration of

accounting information, including: information about the current ratio, financial leverage, return on investment, and so

on. It is very useful in making investment decision. Thus, although some previous studies using multiple linear

regression analysis showed a relatively small coefficient of determination (R2), but in reality the accounting information

contained in financial statements has relevance value and useful for investors.

There is the usefulness of accounting information in making investment decision, then the presentation of accounting

information is necessary in order to provide benefits for the users of financial statements to make the best investment

decisions. It is suggests that, there is relevance value between values of market and accounting. Further, this approach

emphasizes that the decision usefulness of accounting information contained in financial statements must provide the

value of usefulness to its users (investors) in terms of decision making. Wignjohartojo (1995:41) states that the decision

usefulness approach of accounting information is an approach to the financial statements based on historical costs to

become more useful. This approach focuses on the interests of the users of financial statements, their decision, the

information they need, as well as their ability to process accounting information.

The main objective of financial accounting is to present information that is useful for those users for decision

making. Therefore, the presentation of financial statements should consider the accounting information that users

required. In other words, accountants should adjust accounting information presented in financial statements with the

needs of the users so as to produce an optimal decision making. In this way, the accounting information presented in

financial statements would be more useful. Ball and Brown (1968) states that the accounting information useful for

decision making is more emphasis on content of information and timeliness in its presentation.

However, in terms of the investment decision depends on the individual decision makers. Therefore, the information

is individualized. That is, individuals may react differently to the same sources of information. Investors need

accounting information as the basis for the analysis of investment decisions. The financial statements do not provide

any information that may be required of users in decision making because in the general describes financial condition

and the influence of events in the past. Therefore, in order to make economic decisions, the users of financial statements

require an evaluation or analysis based on accounting information contained in financial statements. Scott (2009:13)

mentions that the investment decisions made by investors rationally in order to maximize his utility, on average,

investors use financial accounting information for consideration in their investment decisions.

Accountants, as a provider of information, should be provide accounting information complete, accurate, and timely

so to provide opportunities for investors to make decisions rationally so as to achieve results as expected. Accountants

are expected to know and understand the meaning of the useful of information presented to users. Scott (2009:59)

argues that the essential quality of the information contained in financial statements is its simplicity to be immediately

understood by the user.

The concept about the usefulness of the presentation of accounting information for decision making is supported by

the statements of the informants, that the accounting information contained in financial statements useful to investors

for making investment decisions. The following opinions expressed:

1. The fundamental analysis is very important to be considered in making investment decision. (Excerpt of

interview with PWS on December 17, 2010)

2. The financial statements describes the fundamental aspects of corporate finance and quantitative, as well as

useful for projecting and assessing a company that can provide optimum useful for investors. (Excerpt of

interview with AM on December 22, 2010)

3. Analysis of financial statements is a fundamental analysis, which is useful for predicting the returns and risks

of investment, and it is very important for investment decisions. There are three analysis in the investment

decisions, consist of: (1) fundamental analysis, (2) technical analysis, and (3) rumors. Fundamental analysis

has a very large proportion, because fundamental analysis concerned with financial statements. (Excerpt of

interview with IWR on December 23, 2010)

4. The financial statements are an extremely important source of information for analysts (investors) in making

investment decision. The usefulness of financial statements to be optimal, if it can be analyzed further through

the analysis of financial ratios, so it can be estimated the financial condition and direction of the company.

(Excerpt of interview with WB on December 27, 2010)

5. Accounting information is usually just entering historical data only, not projecting. Unlike the finance which

uses tools to perform valuation and projections so that the data for accounting information can not be used for

decision making, but the accounting data used as the basis for project finance in the future, both the returns and

risks. (Excerpt of interview with AH on January 9, 2011)

Thus, based on the qualitative analysis can be concluded that the accounting information contained in financial

statements has a value relevance and useful for investors. This study’s findings add strength of the concept of value

relevance of accounting information and the usefulness of accounting information for market participants (investors).

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