You are on page 1of 18

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0140-9174.htm

MRN
29,9

The valuation relevance of


non-financial information
Per Flostrand and Niklas Strom

580

Department of Business Studies, Uppsala University, Uppsala, Sweden


Abstract
Purpose Research has called for increased relevance of business reporting. A step towards that
goal is an increased disclosure of non-financial information. At the present time, non-financial
information is mostly provided on a voluntary basis.
Design/methodology/approach Valuation relevance of non-financial information is studied by
examining the information content of 200 analyst reports written on a respective number of firms
listed in the S&P 500 index, while simultaneously performing a disclosure study of non-financial
information by the same 200 firms in their annual reports.
Findings We found the valuation relevance of non-financial information to be related to the size of
the target firm. Further, analysts use of non-financial information is related to the level of nonfinancial information in the 10-k report of the target firm. Finally, analysts tend to rely more heavily
on forward-looking non-financial information than on historical non-financial information.
Practical implications The findings in this paper have implications for policy makers, preparers
of business reporting, and others having to make judgments on information usefulness.
Originality/value This study looks at the valuation relevance of non-financial information, as
opposed to earlier studies that have judged the usefulness of non-financial information by measuring
its value relevance. Information is regarded to have valuation relevance if it is used by analysts in the
valuation process. Hence, valuation relevance offers an alternative way of measuring information
usefulness.
Keywords Management information, Financial information, Information disclosure,
Accounting valuations
Paper type Research paper

Management Research News


Vol. 29 No. 9, 2006
pp. 580-597
# Emerald Group Publishing Limited
0140-9174
DOI 10.1108/01409170610709014

Introduction
Over the past two decades, business reporting practices have been heavily criticized
by academics and practitioners alike. A stream of empirical accounting research has
tested the value relevance of accounting information during different periods. Early
studies found a decline in the association between returns, on the one hand, and both
earnings and book values, on the other (Francis and Schipper, 1999; Lev and Zarowin,
1999). However, other studies have found that results are largely dependent on the
methods employed (Chang, 1998). Additionally, Brown et al. (1998) found no significant
change in the relevance of earnings over time.
This study looks not at the value relevance, but rather at the valuation relevance
of information. Information has valuation relevance if it is used by analysts in the
valuation process. This concept clearly differentiates from value relevance, which is
defined by the statistical relation between information (such as earnings) and share
price. We introduce valuation relevance as a simple indicator of the usefulness of
information to users of financial reports, in this case financial analysts. In this study,
we observe the valuation relevance of a set of 70 non-financial information items
by studying the contents of a set of sell-side financial analyst reports. The term
non-financial information in this study refers to qualitative information outside of the
four financial statements and footnotes. The operationalisation of non-financial
information in this study is the index of 70 items provided in the appendix. This index
was developed by Robb et al. (2001) based on the American Institute of Certified Public

Accountants (AICPA) 1994 Jenkins Committee Report and the database related to that
study[1]. Hence, the definition of non-financial information in this study is not
exhaustive but rather limited to the items listed in the appendix. Additionally,
information may be considered non-financial even though they are dollar denominated
if that information is not included in any of the four financial statements.
The concept of valuation relevance provides an alternative way of determining
usefulness of non-financial information. Valuation relevance does not necessarily mean
that a piece of information has an impact on the market price of a security. However, it
does mean that the analyst considers it useful enough to include in the valuation
process. Valuation relevance is a behavioral definition of information usefulness,
whereas value relevance is a statistical definition of information usefulness.
The aim of this study is to assess the usefulness of non-financial information by
testing the valuation relevance of the non-financial information items recommended
in the Jenkins report. To that extent valuation relevance is used as a measure of
information usefulness. Furthermore, we examine the association between analysts
use of non-financial information and institutional and environmental factors (such as
industry, firm size, and a firms level of intangibles) in order to identify contextual
factors that affect the usefulness of non-financial information. The study contributes to
the research area on non-financial information and analysts by:
(1) investigating the valuation relevance of non-financial information;
(2) looking at both supply and demand sides of information;
(3) testing the valuation relevance of the recommendations of the Jenkins report;
and
(4) using current empirical data.
Reporting non-financial information
Theoretically, accounting information is becoming less relevant if it fails to include
some intangible values in the balance sheet. Because firms are increasingly relying on
intangibles for their future success, this accounting treatment has meant a gradually
decreasing relevance of accounting information (Wallman, 1995; Lev and Zarowin,
1999). The criticism has centered on the argument that business reports have been
lagging as opposed to leading, which is what users are looking for. In a measure to
solve this problem the AICPA Board of Directors commissioned the Jenkins Committee
in 1991 to recommend (1) the nature and extent of information that should be made
available to others by management and (2) the extent to which auditors should report
on the various elements of that information (AICPA, 1994, p. 2, Appendix IV). Having
developed and executed a study designed to better understand the information needs
of investors and creditors, the Jenkins Committee Report, published in 1994, contained
recommendations on business reporting. The report suggests that to meet the needs of
users, business reports must:
(a) Provide more information with a forward-looking perspective, including managements
plans, opportunities, risks, and measurement uncertainties. (b) Focus more on the factors that
create longer term value, including non-financial measures indicating how key processes are
performing. (c) Better align information reported externally with the information reported to
senior management to manage the business (AICPA, 1994, p. 5).

In essence, the needs of users of business reports were no longer thought to be satisfied
with conventional business reports including balance sheets, income statements,

Valuation
relevance of
information
581

MRN
29,9

582

cash-flow statements, and statements of changes in owners equity. According to the


Jenkins Committee, business reports now had to include information relevant in
predicting the future performance of the firm, whatever form or shape that information
might have. Users were looking for leading, instead of lagging, indicators of
performance. Rather than being told what last years return on investment was, users
wanted information that would help them forecast current and next years returns
on investment. The requested leading information was contextual: what is relevant
for one firm might not be applicable for other firms. Investors started requesting
information they could use, i.e. information that was valuation relevant.
The Jenkins report discussed above is one of several frameworks trying to deal with
the growing concern that the current financial reporting policies are inadequate. One
recent report discussing the problems with the current business reporting practice is
the Institute of Chartered Accountants in England and Wales (ICAEW, 2003) report
Information for Better Markets New Reporting Models for Business. The ICAEW
report contains a summary of 11 frameworks for new business reporting models and
discusses merits and problems with the existing models as a way on how reporting
practice can be improved. One of the proposed solutions is the Jenkins report. The main
reason to use the Jenkins report in the present paper was because it has become
extremely influential (Beattie et al., 2004). Although by now a dated report, the issues
raised in the Jenkins report in 1994 have remained of great concern as witnessed by
more recent developments (e.g. FASB, 2001; Eustace, 2001).
One apparent characteristic of this information is that it is unsuitable for
standardization. Although the form of these disclosures can be standardized, the
substance of the disclosure is not easily standardized. Traditionally, information
considered relevant for users of business reports have been standardized and
mandated, resulting in a uniform reporting of balance sheet, income statement, cashflow statement, and statement of changes in owners equity. The information items
included in these reports are universal in that they are applicable for all firms and more
or less relevant for users of each firms report.
However, because of the contextual nature of the information now required to
satisfy a users needs, this information cannot easily be mandated. The hope then for
increased value relevance of business reporting is that firms themselves identify which
information is relevant for the users of its reports and disclose this information
voluntarily. The kinds of information disclosures recommended in the Jenkins report
are then suggested to be disclosed on a voluntary basis.
The inevitable question is, therefore, whether companies can be trusted to identify
and disclose critical information to the market. So far, we have heard the Jenkins
Committee insist that their proposed non-financial information disclosures are
relevant, and there are studies testing the disclosure of such information by firms,
but it is not known whether this information is useful to one of the primary users
of financial information, namely sell-side financial analysts. The work of financial
analysts includes collecting and interpreting information in order to predict future
performance and stock returns of target firms. Analysts can be seen as both
complements and substitutes for firm disclosed information; for instance, De Franco
(2004) found that analysts were mainly substitutes for firm disclosures. This
observation indicates that one role of analysts is to sort out useful from non-useful
information and communicate a summary of the useful information to their clients, the
investors.

The paper is organized as follows: section 2 presents the hypotheses; section 3


describes the design of the study and the data collection procedure; section 4
summarizes the results; and the final section summarizes the conclusions and
discussion.
Formulation of hypotheses
Earlier studies have showed that firm size, industry, book-to-market, and intangibles
affected the provision of non-financial information (e.g. Arvidsson, 2003; Bukh et al.,
2005; Vanstraelen et al., 2003; Gelb, 2002). Thus, the present study attempts to
determine which variables affect the occurrence of non-financial information in analyst
reports. These variables may correlate with each other and thus a correlation analysis
of the independent variables is conducted and the results are reported in the results
section. To determine the variables effect on the occurrence of non-financial
information in analyst reports we tested the following hypotheses (all hypotheses are
stated in their alternate form):
H1. The provision of non-financial information in analyst reports is negatively
related to book-to-market of the target firm.
The difference in book-to-market is considered a proxy for future growth opportunities
(e.g. Edvinsson and Malone, 1997; Frankel et al., 1999). This is because the lower the
book-to-market ratio, the lower proportion of the market capitalization is constituted
by values accounted for in the balance sheet. It is, therefore, hypothesized that firms
with a lower book-to-market ratio analysts provide a higher degree of non-financial
information in the analyst report to justify a relatively high market valuation and
provide information on the future growth opportunities.
H2. The provision of non-financial information in analyst reports is positively
related to the size of the target firm.
Empirical evidence has demonstrated that the level of disclosure is related to firm size.
For example, Cooke (1989), Raffournier (1995), Rippington and Taffler (1995), and
Adrem (1999) reported a positive correlation between firm size (e.g. total assets,
turnover, or market capitalization) and firm disclosure level. Because larger firms are
more scrutinized and work in a richer information environment, such firms generally
have a higher level of disclosure. As larger firms have a richer information
environment, it is hypothesized that the extent of non-financial content in the analyst
report is positively related to size of the target firm.
H3. The provision of non-financial information in analyst reports is related to the
industry of the target firm.
Studies on the association between firm industry and disclosure have presented
inconclusive results (Marston and Shrives, 1996). However, some evidence indicates a
disclosure industry effect. For example, both Raffournier (1995) and Cooke (1991)
showed that manufacturing firms tend to disclose more than firms from other
industries. Other evidence of an industry effect comes from Bukh et al. (2005) who
found that high-tech firms (i.e. IT and telecommunications industries) had the highest
intellectual capital (IC) information disclosure, defined in Bukh et al. (2005, p. 714) as
non-accounting information based on knowledge resources. Recently, Strom (2006)
noted that tech firms disclosed more information than non-tech firms. An explanation
of this finding is that industries differ in information environments and, therefore, the

Valuation
relevance of
information
583

MRN
29,9

demand and supply of information differ as a function of industry. It is, therefore,


hypothesized that non-financial disclosure is associated with industry.
H4. The provision of non-financial information in analyst reports is positively
related to level of intangibles in the target firm.

584

Earlier research has found that firms with intangible assets are more likely to provide
supplementary disclosures (Gelb, 2002). Therefore, it is hypothesized that for
companies with a high level of intangibles analysts provide a higher level of nonfinancial information in their reports. Intangibles are operationalized here as the book
value of intangibles reported in the financial statement, whereas book-to-market as
applied in H1 tries to capture a firms intangible values, which are not reported in the
balance sheet. Hence, H1 is concerned with the relationship between the provision of
information in analyst reports and the target firms level of unrecognized intangible
values, while H4 is concerned with the relationship between the provision of
information in analyst reports and the target firms level of recognized intangible
values. A problem with recognized intangible values is that US generally accepted
accounting principles (GAAP) does not allow the recognition of internally generated
intangibles to the same degree as acquired intangibles. As a result, the level of
intangibles on companies balance sheets is highly influenced by past acquisitions.
Design of the study and sample
Sample and data collection
We tested valuation relevance of information items recommended by the Jenkins report
by conducting a disclosure study of 200 sell-side analyst reports written on a respective
number of Standard &Poors (S&P) 500 companies. We subsequently compared the use
of non-financial information items in sell-side analysts reports with the disclosure of
the same items in the annual reports of target companies[2].
The sample consists of 200 randomly selected firms from the S&P 500 in 2004. The
S&P 500 represents some of the largest and most intensely scrutinized companies in
the world. Annual reports (10-k) and randomly selected analyst reports were collected
for the 200 firms. The analyst reports were randomly selected among all reports
published between the release of the firms 10-k report and the release of their first
quarterly report of the year 2005. We choose this period because our study included a
comparison between disclosures of firms 10-k reports and the content of sell-side
analyst reports. Excluded from the sample were financial firms. Annual reports were
gathered from the Securities and Exchange Commission (SEC) and analyst reports
from the Investext Plus Database. The primary source of data was hand gathered from
the 10-k reports and the reports from analysts. Complementary data were collected
from COMPUSTAT[3].
Operationalization of variables
Variables used in the present study to explain the provision of non-financial
information, in the analyst report were firm size, book-to-market ratio, industry,
intangibles, and annual report disclosure. We also controlled for the following two
variables: brokerage firm and sell-hold-buy recommendation. Firm size (net sales),
book-to-market ratio, industry and book value of intangibles were all based on
year-end figures in 2003 from the COMPUSTAT database. The brokerage firm was
the firm that issued the analyst report and sell-hold-buy recommendation was the
recommendation given in each analyst report.

Disclosure instrument
A disclosure index, which follows earlier research that studies the incidence of
disclosure information (e.g., Chow and Wong-Boren, 1987; Cooke, 1989; Adrem, 1999;
Camfferman and Cooke, 2002), was used to gauge the level of non-financial information
in analyst reports and annual reports. Each analyst and annual report was read from
cover to cover to obtain the disclosure score.
The present study used a disclosure index developed by Robb et al. (2001);
The Robb et al. index is based on the work of the AICPA (The Jenkins report).
The index was constructed of items that investors have reported as relevant
and that should be disclosed by firms. The same disclosure index was applied to
both the annual and analyst reports. The disclosure index was grouped into two main
categories, with three sub-categories within each main category. The two main
categories were:
(1) forward-looking information (36 items); and
(2) historical information (34 items) (see the appendix for a description of all items
included in the index).
A typical example of forward-looking information provided in the analyst report was
(Citigroup, 2005a): Key risks we see to Amgen achieving our valuation target include
the following: any delay in clinical development or regulatory approval of developing
products could have a material impact on the companys earnings.
A typical example of historical information provided in the analyst report was
(Citigroup, 2005b):
American Standard is a market leader in each of its segments: Heating & Cooling, Bath &
Kitchen, and Vehicle Controls. The Heating & Cooling division makes products under the
Trane and American Standard brand names. The company sells its Bath & Kitchen fixtures
through many brand names including American Standard, Ideal Standard, and Porcher.

One problem with the forward-looking and historical categorization is what items that
belong to what category. Thus, a certain amount of subjectivity is used by the authors
in the coding process. However, we follow the categorization defined by Robb et al.
(2001).
One advantage of using this index is that other researchers (e.g. Robb et al., 2001;
Vanstraelen et al., 2003) have applied the index in the past. Another advantage of this
index is that other researchers and regulating bodies have scrutinized the relevance of
the items for investors. However, one drawback with the index is that it should be seen
as a wish list for information that the firm should disclose because all items on the
index is not applicable to provide for all firms. This means that no firm will disclose all
information items included in the index.
The present study uses a method in which all items in the index are non-weighted
(e.g. Raffournier, 1995; Adrem, 1999). Criticism has been directed towards weighted
scoring approaches because of the subjectivity when setting the weight preferences.
According to Adrem (1999), a non-weighted approach is preferred in that it has fewer
measurement errors. The following formula to calculate the disclosure level for a
specific firm is employed:
Disclosure level for firmj

mj
X
i1

di

Valuation
relevance of
information
585

MRN
29,9

586

Disclosure itemi, di, is 1 if the item is disclosed, and 0 otherwise. The total number of
items in the index is mj. The disclosure index consists of 70 items[4] with a
measurement range from 0 to 70 and is, therefore, a censored variable[5].
A limitation of content analysis in general, which holds for the application of
content analysis using a disclosure index as in this study, is the methods subjectivity.
The method relies on a researchers subjectivity in the coding process. The disclosure
index used in this study contains non-financial information items that require the
researchers to use their judgment in the coding process. A consequence of the
subjectivity of the coding process is that the results may be difficult to replicate. Hence,
comparisons of the results of this study to other studies using the same disclosure
index may have limited usefulness. The coding of the empirical data used in this study
was performed by both authors (Per Flostrand and Niklas Strom). The reliability of
the content analysis employed in this study was achieved using two coders for a
sample of the material in order to assure that the authors were consistent in their
coding. In other words, because the nature of the disclosure index requires the authors
to use their judgment in the coding process, the results are subjective. However, by
being methodologically coherent, the results of the coding process are at least
consistent across the sample. A problem, however, is the comparability across studies
since the authors of this study might code differently than authors of previous or future
studies.
Regression model
The following multivariate regression was employed to assess the effect the
explanatory variables had on the extent of non-financial information content in analyst
reports:
AnalystD a0 b1 AnnualD b2 Size b3 BM b4 Intangibles e
where, AnalystD refers to analyst report content (measured as the level of nonfinancial information content in the analyst report), AnnualD refers to annual report
disclosure (measured as the non-financial information disclosure level in the annual
report), Size refers to the log value of net sales at year-end 2003[6], BM refers to the log
value of book-to-market at year-end 2003, Intangibles refers to book value of reported
intangibles at year-end 2003, and e is the error term.
A multicollinearity test was performed which indicated that the multicollinearity
between the explanatory variables in the multivariate regression was not a problem[7].
Results
Descriptive results
When looking at items disclosed in the analyst report, we found that the average
number of items disclosed was 5.33 (out of 70) (see the appendix for descriptive
statistics). It should be noted that all 70 items of the index will not be applicable to any
one company. One such item could for example be volume and prices of materials
consumed which would be non-applicable for a consultancy firm. The index should be
seen as a wish-list where all 70 items will never be relevant for one firm. Accordingly,
while the index does include 70 items an average score of 5.33 does not mean that 64.67
relevant information items were not disclosed. Evaluating whether an average score of
5.33 items is a high or low number is not the purpose of this study. However, the low
average score does raise concerns that the index might not fully capture what it intends

to capture. Descriptive results indicated that seven or more items of non-financial


information were disclosed in 27 per cent of all analyst reports.
When looking specifically at item level of disclosure in the analyst report, the four
most commonly disclosed items were forecasts (forward looking, disclosed by analysts
in 90 per cent of all reports), beneficial or detrimental circumstances in which the
company is involved and that may cause an increase or decrease in future cash flows
(forward looking, disclosed by analysts in 68 per cent of the cases), description of
business and industry structure (historical, disclosed by analysts in 63 per cent of the
cases), and changes in markets, competition or technology (forward looking, disclosed
by analysts in 28 per cent of all reports). See the appendix for a full list of the
percentage of each item disclosed in the analyst annual reports.
The data analysis thus far suggests that a few of the information items are
frequently provided in the analyst report. All except one of the four most commonly
disclosed items pertain to forward-looking information, which supports our
expectation that analysts disclose more forward-looking information than historical
information. Additional tests also supported this as a significantly higher mean was
noted for the level of forward-looking non-financial information than for historical nonfinancial information (t 11.0; p 0.000)[8]. Moreover, the same relation was found for
the annual reports, i.e. annual reports contained more of the forward-looking nonfinancial information. These findings make intuitive sense in that the main purpose
of both reports, at least from the users perspective, is to learn more about a firms
prospects for future performance.
When examining the annual report disclosures of our US sample, we found that the
average number of items disclosed in the annual report was 15.14. Vanstraelen et al.
(2003) reported that the average number of items disclosed in the annual reports in
the Netherlands, Belgium, and Germany were 22.47, 21.13, and 21.50, respectively[9].
These findings suggest that firms listed in the USA have a lower non-financial
disclosure as compared with European firms. However, the varying results could be
due to a host of factors, including timing of the studies, size of the firms in the sample,
industry composition, and culture. One plausible reason for the differences found is
because of the heightened legal environment in the USA.
Pairwise comparative analyses between the analyst reports and the annual reports
One aim of this study was to investigate the association between disclosures in
analyst reports and annual reports, i.e. to investigate if the annual report is a relevant
source of information for analysts. Because we perform identical information content
studies of both annual reports and analyst reports on the same firms, it is possible to
perform pairwise tests to determine whether an item that is provided in the analyst
report is also disclosed in the annual report. Such tests can analyze to what extent
disclosures in analyst reports are preceded by disclosures in annual report and,
therefore, gauge the importance of annual reports as an information source for
financial analysts.
The pairwise tests produce a percentage indicating what proportion of the item
disclosure in analyst report was preceded in annual reports. A score of 100 per cent
means that in all instances in which an item was disclosed in the analyst reports it had
previously been disclosed in the annual reports. Similarly, a score of 0 per cent entails
that in no instances in which an item was disclosed in the analyst reports had it
previously been disclosed in the annual reports.

Valuation
relevance of
information
587

MRN
29,9

588

The pairwise results showed that in 39 per cent of the instances when an item is
provided in the analyst report it is also disclosed in the annual report. These results
indicate that analysts rely on additional information sources beyond annual reports,
accounting for a majority of their information needs. However, on an item level,
the results of the pairwise tests revealed that some items used in analyst reports
had a high frequency of occurrence in annual reports. For example, the item Mission,
broad objectives and strategy to achieve broad objectives was disclosed in both reports
with a score of 100 per cent. The item Description of business and industry structure
had a score of 71 per cent and Description of principal products/services had a score of
76 per cent. Forecasts, however, with a score of 36 per cent, is an example of an item
that is commonly provided in the analyst report but rarely disclosed in the annual
report.
Correlation analysis
The correlations between the dependent (analyst report content) and independent
variables (annual report disclosure, book-to-market, and firm size) are presented in
Table I. The correlation analysis revealed that firm size was significantly related to
analyst report content, annual report disclosure, book-to-market, and intangibles.
The implication of this finding is that larger firms have higher analyst report
information content, a higher degree of annual report disclosure, a higher book-tomarket ratio, and higher levels of intangibles. This finding is not surprising as earlier
studies reported a positive association between firm size and non-financial disclosure
(e.g. Arvidsson, 2003; Robb et al., 2001; Vanstraelen et al., 2003). Larger firms also had a
higher book value of intangibles. Moreover, the results from the correlation analysis
showed that firms with high annual report disclosure had a higher book value of
intangibles, indicating that firms with a high degree of intangibles supply more
non-financial information in the annual report to inform investors about their
value-creating processes.
Analyst
report
content
Analyst report content
Annual report disclosure
Book-to-market
Firm size
Intangibles

Table I.
Pearson correlation
analysis

Correlation
Significance
Correlation
Significance
Correlation
Significance
Correlation
Significance
Correlation
Significance

Annual
report
disclosure

Book-tomarket

Firm
size

Intangibles

1
0.119*
0.047
0.006
0.466
0.148*
0.018
0.029
0.349

1
0.082
0.125
0.194**
0.003
0.183**
0.006

1
0.421**
0.000
0.295**
0.000

1
0.556**
0.000

Notes: Analyst report content is operationalized as the extent of non-financial information


provided in the analyst report. Annual report disclosure is operationalized as the extent of nonfinancial information disclosed in the annual report. Size is operationalized as log of net sales of
analyzed firms. Book-to-market is operationalized as log of book-to-market ratio. Intangibles are
operationalized as log of book value of intangibles. *Correlation is significant at the 0.05 level
(one-tailed); **correlation is significant at the 0.01 level (one-tailed)

Results from the univariate analyses


The results from the univariate analysis supported our expectation that analysts are
influenced by the information environment of the target firm. More information
disclosure in the annual report entails higher information content in the analyst report.
The total analyst report content was positively and significantly related to annual
report disclosure (t 1.687; p 0.093). This finding is in line with Arvidsson (2003),
who reported a positive association between the extent of disclosure on intangibles in
analyst reports and the extent of disclosure in annual reports. Table II summarizes the
results of the univariate regressions.
This finding is not surprising given that annual reports are important sources of
non-financial information for financial analysts (Rogers and Grant, 1997) and level of
non-financial information disclosure in annual reports could proxy for level of nonfinancial disclosure in other firm communications, such as press releases and analyst
meetings.
H1 examined the association between book-to-market and the provision of nonfinancial information in the analyst report. The results indicated no significant relation
between book-to-market and level of non-financial information disclosure in analyst
reports. Thus, H1 was not supported by the data. Our expectations were that because
book-to-market is a measure, albeit a crude one, of a firms level of unrecognized[10] IC,
there would be an inverse relation between book-to-market and non-financial
disclosure levels. The lack of such a relation could be interpreted to mean that the
disclosure index developed from the recommendations of the Jenkins report does not
capture the information items important to analysts; alternatively, there simply is no
relationship between book-to-market ratios and the provision of non-financial
information in analyst reports.
H2 tested whether a positive relation existed between the size of the firm and the
level of disclosure. The hypothesis was confirmed by the finding that non-financial
information content in analyst reports was significantly and positively related to the
size of the target firm[11] (t 2.109; p 0.036) (Table II). Total analyst report disclosure
and forward-looking analyst report disclosure (untabulated results of log net sales,
p 0.01) were positively and significantly related to firm size. However, when total
disclosure was broken down into historical and forward-looking information, a
difference was noted between annual reports and analyst reports. Specifically, whereas
both annual reports and analyst reports displayed a significant positive relation

Independent variable
Annual report disclosure
Firm size
Book-to-market
Intangibles

Sign
prediction

t-value

Significance
( p-value)

+
+
+
+

200
200
200
186

1.687*
2.109**
0.085
0.390

0.093
0.036
0.932
0.697

Notes: The dependent variable is analyst report content. Annual report disclosure is
operationalized as the extent of non-financial information disclosed in the annual report. Firm size
is operationalized as log of net sales of analyzed firms. Book-to-market is operationalized as log
of book-to-market ratio. Intangibles are operationalized as log of book value of intangibles.
*Significant at the 0.10 level; **significant at the 0.05 level

Valuation
relevance of
information
589

Table II.
Results of the univariate
regressions

MRN
29,9

590

between firm size and forward-looking information, only annual reports showed a
significantly positive relation between firm size and historical information. For annual
reports, total annual report disclosure (untabulated results, p 0.04), forward-looking
annual report disclosure (untabulated results, p 0.08), and historical annual report
disclosure (untabulated results, p 0.05) were positively and significantly related to
firm size.
H3 on industry differences was only partly supported by the data. Industry
differences were tested using global industry classification standards (GICS). The GICS
system consists of ten sectors, 24 industry groups, 64 industries, and 139 subindustries. For the purposes of this study, we relied on the sector-level GICS
classification in that any further classification into industry groups, industries, or subindustries would be unsuitable for our sample size. The ANOVAs showed mixed
results regarding industry differences in analyst disclosures of non-financial
information as hypothesized in H3 for disclosure score per industry. Whereas no
significant difference was obtained across industries for total disclosure (ANOVA,
p 0.161), there were some significant univariate differences, indicating that the
industrial industry had higher levels of non-financial analyst disclosures than
energy, consumer discretionary, and IT industries. We have no theory to account
for why the industrial industry should have higher disclosures than, for example, the
IT industry, which is generally considered an industry with high levels of intangibles.
However, robustness checks controlling for firm size indicated that size of a firm
seemed to drive the industry differences reported for non-financial content as
significant differences between the industries were reported. Therefore, we can not
conclude that industry as such explains differences in non-financial content in analyst
reports.
Level of intangibles was hypothesized (H4) to be positively related to the level
of analyst disclosure. The results, however, did not support the hypothesis in that
no significant association was observed between log of intangibles in the balance
sheet and level of non-financial content in analyst reports. Using log of intangibles
on the balance sheet as an explanatory variable showed that, whereas annual report
total and forward-looking non-financial disclosures were significantly and positively
related to log of intangibles, there was no significant relation between log of
intangibles in the target firm and the level of non-financial information by analysts. In
other words, companies with more intangibles on their balance sheets tend to disclose
more non-financial information, but analyst disclosures are not significantly affected
by it.
Buy-sell-hold recommendation was not associated with the non-financial
information content in analyst reports. Thus, it cannot be concluded that analyst
reports with specific recommendations contain more information on non-financial
information (untabulated results, p 0.292). Brokerage firm, however, was associated
with the level of non-financial information content in analyst reports. A significant
difference (untabulated results, p 0.068) on the level of non-financial information
provided in the analyst report between brokerage firms was detected, indicating that
some brokerage firms use non-financial information more than others.
Multivariate regression results
The multivariate regression explored whether analyst report content was associated
with annual report disclosure. Moreover, H1, H2, and H4 were tested in the

Independent variable
Annual disclosure score
Log book-to-market
Log intangibles
Firm size (log net sales)
Adjusted-R2
Standard error
F-value

0.028
2.629
2.354

Coefficient

t-value

Significance
( p-value)

0.069
0.405
0.354
1.038

1.743*
0.694
1.101
2.259**

0.083
0.489
0.272
0.025

0.056

Notes: Dependent variable: analyst report non-financial content. Coefficient refers to


unstandardized coefficients. *Significant at the 0.10 level; **significant at the 0.05 level

multivariate regression. Table III summarizes the results from the multivariate
regression analysis.
The results of the multivariate regression were consistent with those of the
univariate regressions. The findings showed that analyst report content was
significantly and positively related to annual report disclosures and firm size, i.e. the
explanatory factors of non-financial information content in the analyst report were
firm size of the analyzed firm and the level of non-financial disclosure in the annual
report. H2 was, therefore, supported by the multivariate analysis. Book-to-market was
unrelated to analyst report content and no relation was found between analyst report
content and intangibles.
Conclusion and discussion
This study introduces the concept of valuation relevance as a criterion in assessing
information usefulness. In a world where standard setters and others are striving
to improve the usefulness of financial reports and where the value relevance concept is
at best a noisy and crude criterion for information usefulness, we offer valuation
relevance as an alternative and more intuitive measure of information usefulness.
Valuation relevance is easily observable and does not suffer the methodological
problems associated with value relevance. In contrast to value relevance, which rests
on a statistical relation between information and value, valuation relevance has a
qualitative relation with information usefulness. When the information needs of users
of financial statements are changing from quantitative to qualitative and financial to
non-financial, valuation relevance offers standard setters, preparers of financial
reports, and others an intuitive and accessible way of measuring information
usefulness.
In the present study, we used the valuation relevance criterion to assess the
usefulness of a specific set of information items as specified in the Jenkins report
(AICPA, 1994). While the content analysis method used in this study offers a practical
and direct way of studying the work and information usage of analysts, it also has
weaknesses. One limitation of the method employed in this study is the subjectivity
inherent in the coding process, which impedes replicability and comparisons with other
studies. Additionally, low disclosure scores of the content analysis inevitably raise
concerns over the quality of the disclosure index employed.

Valuation
relevance of
information
591
Table III.
Multivariate regression
statistics on analyst
report content

MRN
29,9

592

The results of the study clearly showed that analysts included this type of
non-financial information in their reports. Hence, this type of information can,
in general, be characterized as valuation relevant. However, out of 70 information items
in the disclosure index the analyst reports contained on average 5.33 information
items. This indicates that the information items in the index are either contextual
in that only a few apply to each firm, or that analysts do not find them valuation
relevant. The fact that annual reports in the sample contained on average 15.14
items from the index suggests both that the items are contextual and that out of the
average 15.14 items disclosed by companies analysts only found 5.33 valuation
relevant.
A few non-financial items that were particularly prevalent in analyst reports were,
for example, forecasts (disclosed in 90 per cent of all analyst reports) and beneficial or
detrimental circumstances in which a company faces and that may cause an increase or
decrease in cash flows in the future (disclosed in 68 per cent of all analyst reports).
However, it is plausible that these disclosures are influenced by the management
discussion and analysis (MD&A) disclosure requirements in the annual report
according to the more recent recommendations of the SEC. Such a disclosure is, for
instance analysis of financial condition and operating performance including both
past and prospective performance[12]. An implication of the findings in this paper
for policy makers is whether the disclosure of specific valuation relevant non-financial
information should be voluntary or mandated. More research is warranted to further
investigate this issue.
Our findings additionally showed that non-financial information content in
analysts reports was significantly related to both annual report disclosure and firm
size. This finding indicates that analysts are affected by the information environment
of the target firm and emphasizes the analysts strong dependency on access to
relevant information. Following our results, the provision by firms and access of
analysts to relevant non-financial information might not be a problem with large firms
in rich information environments, but may be more problematic in smaller firms. The
sample in our study consists of some of the larger firms in the world; despite this, there
was still a positive relation between size of the firm and level of information disclosed
in analyst reports.
Further research is needed on the demand side for non-financial information.
Particularly fruitful would be to investigate to what extent analysts and investors
are restricted in their access to valuation relevant information, as our results indicated
that there was such a constraint regarding non-financial information. This could, for
example, be conducted by interviewing financial analysts. It would also be interesting
to see similar studies of smaller firms and whether the information environment is rich
enough for analysts to discover relevant non-financial information in their analyses of
such firms.
Notes
1. The AICPA study Database of Materials on Users Needs for Information and
Improving Business Reporting A Customer Focus is also known as the Jenkins
report.
2. Analyst reports refer to reports written by financial analysts on behalf of banks and
brokerage firms. Analyst reports generally contain a valuation of the target firm and
conclude with a target price for the security. An annual report in this paper refers to

3.
4.
5.

6.

7.
8.
9.

10.
11.

12.

the 10-k report US firms are obliged to register with the SEC. Such 10-k reports contain
financial and non-financial information deemed useful to investors.
COMPUSTAT is a database containing fundamental company and market data.
The items in the index are a specification of the Jenkins report. For further information
on each item in the index, see AICPA (1994).
Because the dependent variable is censored, an additional statistical test was
performed. Similar results were reported when using the log value of disclosure score
as the dependent variable in the regression.
Because of normality problems, the log value is used for the size variable in the
regression. This is a standard procedure on size variables (e.g. net sales or total assets)
in regression analysis.
VIF (variance inflation factor) statistics was well below the level of 10, which is the
level when multicollinearity is regarded as a problem (Hair et al., 1998).
A forward-looking mean of 3.54 and a historical mean of 1.79 were reported.
Vanstralen et al. (2003) used a maximum score of 65 items in their disclosure index.
Their index was also based on Robb et al. (2001), but had fewer items than the present
study.
Unlike H4, which uses the recorded amount of IC on firms balance sheets.
As a check of robustness, we also operationalized firm size as total assets and market
capitalization. The results were similar regardless how firm size was operationalized.
Additionally, we operationalized firm size as number of pages in the analyst reports or
the annual reports. A significant relation was observed between the length of the
analyst reports and their level of non-financial information content, a relation that is
prevalent in annual reports as well.
See www.sec.gov/rules/interp/33-8350.htm (17 June 2006).

References
Adrem, A.H. (1999), Essays on Disclosure Practices in Sweden: Causes and Effects, Lund
University Press, Lund.
AICPA (1994), Improving Business Reporting A Customer Focus: Meeting the Information
Needs of Investors and Creditors; and Comprehensive Report of the Special Committee on
Financial Reporting, American Institute of Certified Public Accountants, New York.
Arvidsson, S. (2003), Demand and Supply of Information on Intangibles: The Case of KnowledgeIntense Companies, Lund Business Press, Lund.
Beattie, V., McInnes, B. and Fearnley, S. (2004), A methodology for analysing and evaluating
narratives in annual reports: a comprehensive descriptive profile and metrics for
disclosure quality attributes, Accounting Forum, Vol. 28, pp. 205-36.
Brown, S., Lo, K. and Lys, T. (1998), Use of R2 in accounting research: measuring changes in
value relevance over the last four decades, Journal of Accounting and Economics, Vol. 28,
pp. 83-115.
Bukh, P.N., Nielsen, C., Gormsen, P. and Mouritsen, J. (2005), Disclosure of information on
intellectual capital in Danish IPO prospectuses, Accounting, Auditing and Accountability
Journal, Vol. 18, pp. 713-32.
Camfferman, K. and Cooke, T.E. (2002), An analysis of disclosure in the annual reports of UK
and Dutch companies, Journal of International Accounting Research, Vol. 1, pp. 3-30.
Chang, J. (1998), The decline in value relevance of earnings and book values, working paper,
Harvard University, Cambridge, MA.

Valuation
relevance of
information
593

MRN
29,9

594

Chow, C.W. and Wong-Boren, A. (1987), Voluntary financial disclosure by Mexican


corporations, The Accounting Review, Vol. LXII, pp. 533-41.
Citigroup (2005a), Analyst Report of Amgen, Analyst report, Smith Barney.
Citigroup (2005b), Analyst Report of American Standard, Analyst report, Smith Barney.
Cooke, T.E. (1989), Voluntary corporate disclosure by Swedish companies, Journal of
International Financial Management and Accounting, Vol. 1, pp. 171-95.
Cooke, T.E. (1991), An assessment of voluntary disclosure in the annual reports of Japanese
corporations, International Journal of Accounting, Vol. 26, pp. 174-90.
De Franco, G. (2004), Analyst comments and the relation between analyst and firm disclosures,
PhD dissertation, University of Pennsylvania.
Edvinsson, L. and Malone, M.S. (1997), Intellectual Capital, Piatkus, London.
Eustace, C. (2001), The intangible economy: impact and policy issues, Report of the High Level
Expert Group on the Intangible Economy, EU Commission, Brussels.
FASB (2001), Improving Business Reporting: Insights into Enhancing Voluntary Disclosures,
Financial Accounting Standards Board, Norwalk, CT.
Francis, J. and Schipper, K. (1999), Have financial statements lost their relevance?, Journal of
Accounting Research, Vol. 37, pp. 319-52.
Frankel, R., Johnson, M. and Skinner, D.J. (1999), An empirical examination of conference
calls as a voluntary disclosure medium, Journal of Accounting Research, Vol. 37,
pp. 133-50.
Gelb, D.S. (2002), Intangible assets and firms disclosures: an empirical investigation, Journal of
Business Finance and Accounting, Vol. 29, pp. 457-76.
Hair, J.L., Anderson, R.E., Tatham, R. and Black, B. (1998), Multivariate Data Analysis, 5th ed.,
Prentice Hall, NJ.
ICAEW (2003), Information for Better Markets New Reporting Models for Business, Institute of
Chartered Accountants in England & Wales, London.
Lev, B. and Zarowin, P. (1999), The boundaries of financial reporting and how to extend them,
Journal of Accounting Research, Vol. 37, Supplement, pp. 353-85.
Marston, C. and Shrives, P. (1996), A review of empirical research into financial disclosure,
working paper, University of Northumbria at Newcastle.
Raffournier, B. (1995), The determinants of voluntary financial disclosure by Swiss listed
companies, European Accounting Review, Vol. 4, pp. 261-81.
Rippington, F. and Taffler, R. (1995), The information content of firm financial disclosures,
Journal of Business Finance and Accounting, Vol. 22, pp. 345-62.
Robb, S.W.G., Single, L.E. and Zarzeski, M.T. (2001), Nonfinancial disclosures across AngloAmerican countries, Journal of International Accounting, Auditing and Taxation, Vol. 10,
pp. 71-83.
Rogers, R. and Grant, J. (1997), Content analysis of information cited in reports of sell-side
financial analysts, Journal of Financial Statements Analysis, Vol. 3, pp. 17-30.

Strom, N. (2006), IPO pricing does prospectus disclosure matter?, working paper, Uppsala
University.
Vanstraelen, A., Zarzeski, M.T. and Robb, S.W.G. (2003), Corporate nonfinancial disclosure
practices and financial analyst forecast ability across three European countries, Journal of
International Financial Management and Accounting, Vol. 14, pp. 249-78.
Wallman, S.M.H. (1995), The future of accounting and disclosure in an evolving world: the need
for a dramatic change, Accounting Horizons, Vol. 9, pp. 81-91.

Further reading
Eccles, R.G., Herz, R.H., Keegan, E.M. and Phillips, D.M. (2001), The ValueReporting Revolution:
Moving Beyond the Earnings Game, John Wiley & Sons, New York.
Lang, M.H. and Lundholm, R.J. (1993), Cross-sectional determinants of analyst ratings of
corporate disclosures, Journal of Accounting Research, Vol. 31, pp. 246-71.

Valuation
relevance of
information
595

Appendix

Minimum

Maximum

Mean

Standard deviation

200
200

1
2

15
29

5.33
15.14

2.633
5.004

Table AI.
Analyst report score
Annual report score

Descriptive statistics of
disclosure index data

Analyst
report (%)

Annual
report (%)

2.00

3.00

6.00
7.00
15.00
28.00

5.00
17.00
20.50
26.00

7.00
1.50
14.50

31.00
9.50
19.00

11.50
10.50

24.50
31.00

0.50
13.00

6.00
29.00

Strategy and management


Consistency of strategy with external trends and with managerial
approach

4.00

2.00

Enabling infrastructures
Organizational structure
Business strategy
Management philosophy
Employee incentives
Financial information by management responsibility
Goals for return on assets, equity, and capitalization ratio
Identity and background of directors and management
Identity and description of management incentive plans

1.50
3.00
0.50
1.00
0.00
3.00
2.00
2.50

8.00
29.00
12.00
37.50
0.00
8.50
58.50
38.00

Disclosure scoring system


Forward-looking non-financial information
Environment around the company
Ability of new companies to enter the industry
Ability of substitute products or services to displace those of
reporting company
Companys relationships with others
Competitors and their positions within the industry
Changes in markets, competition, or technology
Competitive advantages and disadvantages (identity, source,
and sustainability)
Description of companys industry structure
Growth or shrinkage in market share
Information about economy, companys industry, and company
itself
Intensity of competition in the industry
Recent changes in environment; nature and timing of
companys response
Regulation and legislation affecting segment

(Continued)

Table AII.
Disclosure index and
percentage disclosed

MRN
29,9

596

Disclosure scoring system


Identity of major shareholders, all shares owned, and by directors,
management, and employees
Information about compensation committee interlocks and insider
participation in decisions
Major goals, strategy, and factors that are critical to successfully
implementing strategies
Methods of conducting the business
Mission, broad objectives, and strategy to achieve broad objectives
Nature of disagreements with prior directors, bankers, independent
auditors, and lead counsel
Need to know the major segments by which management operates
the company
Types and amounts of director/management compensation and
methods used to compute
Company trends
Beneficial or detrimental circumstances in which the company is
involved and that may cause increase or decrease cash flows in
the future
Changes in financial position and why
Companys financial flexibility, changes, and why (identify sources
of liquidity)
Explanation of relationships and changes among the data
Qualitative forward-looking information
Forecasts
Prospective information
Plans and objectives
Historical non-financial information
Environment of the company
Description of business and industry structure
Employee involvement and fulfillment-rate of change in it
General development of the business-major events in last five years
Number of employees, average compensation of employees
Related party identity and description of relationship
Scope and description of the business and related properties
Seasonality and cyclicality
Production
Amount and quality of key resources and related suppliers
Definition of industry (or other segment)
Description and duration of important patents, trademarks, etc.
Description of nature of operations and current vulnerability due
to concentrations
Description of principal products/services
Growth in units sold or average prices of units sold
Information about geographic concentrations in the production base
Information about the change in the nature of the warranty for a product
Innovation
Large changes in the proportion of materials purchased from the one
or two largest suppliers
Non-financial historical business information (often about ten years)
backlog figures

Table AII.

Analyst
report (%)

Annual
report (%)

0.00

0.00

0.00

1.50

2.50
6.50
3.00

60.00
24.00
81.00

0.00

0.00

0.50

1.00

0.00

0.00

67.50

63.50

14.50

17.50

11.00
0.50

35.00
0.00

89.50
4.00
20.00

39.50
6.00
75.00

62.50
0.00
15.00
6.00
4.50
1.00
10.50

92.00
0.50
68.00
80.00
22.50
18.00
18.00

1.50
1.50
2.00

1.00
17.00
14.00

1.50
9.50
4.50
1.00
0.50
2.50

0.50
87.50
6.50
5.00
0.00
41.50

0.00

0.00

0.00

6.50
(Continued)

Disclosure scoring system


Recent process, product, or service innovations; sources and
consequences
Relative bargaining power of resource providers
Resource provider satisfaction
Timeliness to perform key activities (production, delivery, developing
new products)
Trends in sales, sales prices, unit costs, and reasons why
Volume and prices of materials consumed
Where products are produced and where they are delivered
Customers
Information about geographic concentrations in the sales base
of a company
Information about technological and regulatory change that may
affect the market
Information from a marketing, merchandising, and distribution point
of view
Large increases or decreases in the proportion of products or
services sold to largest customers
Major contractual relationships
Market acceptance-changes in prices, volumes, and products,
and why
Market penetration and quality
Measures of customer satisfaction
Relative bargaining power of customers

Analyst
report (%)

Annual
report (%)

7.00
1.50
0.00

40.00
0.50
0.00

1.00
7.00
1.00
0.00

10.00
24.50
4.50
5.50

6.00

33.50

2.00

6.00

6.00

43.50

3.50
11.00

3.00
20.00

0.50
5.00
1.00
2.50

1.00
18.00
5.50
1.00

About the authors


Per Flostrand is a final year PhD student in Accounting at Uppsala University in Sweden,
scheduled to defend his PhD thesis in the fall of 2006. Mr. Flostrand teaches Financial
Management and Valuation at Uppsala University. Mr. Flostrand has an MSc in Accounting and
Finance from the London School of Economics and a BA in Business Administration from
Flagler College, Florida, USA. Per Flostrand is the corresponding author and can be contacted at:
per.flostrand@fek.uu.se
Niklas Strom is a final year PhD student in Accounting at Uppsala University in Sweden,
scheduled to defend his PhD thesis in the fall of 2006. Mr. Strom teaches Accounting and
Financial Management at Uppsala University. Mr. Strom has an MSc in Accounting and Finance
from Stockholm University, Sweden, and a BSc in Engineering from Royal Institute of
Technology, Sweden. He can be contacted at: niklas.strom@fek.uu.se

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com


Or visit our web site for further details: www.emeraldinsight.com/reprints

Valuation
relevance of
information
597

Table AII.

You might also like