Does whether we display information in a different
part of an annual report impact how an analyst uses
that information and how they value a company?
If you were to look at a company's annual report, you
would find there is an awful lot of information in there.
You've got the financial statements.
This is a kind of an important part, right?
This is telling us where we stand, where we've been, what
happened with our cash flows.
Now there's more or less four pages of financial statements,
if you want to think of the reports themselves.
Income statement, balance sheet, cash flow statement,
statement of changes in equity.
And then there's about 40, probably, pages of notes.
At a company of any sort of size, of any sort of
complexity, there is an awful lot of information that's
being disclosed.
Now, the efficient market hypothesis, which was clearly
in favor at the time, would say it doesn't matter where we
disclose information or how we disclose information.
If the information is disclosed, it will be used if
it's relevant.
Psychology theory would look at that question a little
differently and say, as human beings, we have limited
processing abilities.
We have a limited amount of time.
And how you disclose information may well have an
impact on whether it's used and how it's used.
The Financial Accounting Standards Board at the time
said, what we want you to do is assemble this information
about this thing called comprehensive income, which is
basically changes in equity that were going directly to
equity and not sitting on the income statement.
We would like you to put this right after net income.
So, have your standard income statement.
Follow it by a couple of lines about these other items.
Seemed reasonable enough.
There was nothing new that had to be gathered.
All you had to do was place it from a scattered set of
locations to one spot.
And the spot they asked people to put this in, they asked
companies to put this in, was at the end
of the income statement.
Didn't seem controversial to us.
All kinds of companies came back and said, no, no, no, no,
we can't do this.
This is going to be a big problem.
And so we were a little curious as to, one, why was
there all this pushback?
And two, did it really make a difference?
And as it turns out, it did.
All of us only have 24 hours in a day.
And we can't devote all our time to looking at all the
information.
So, to the extent that financial accounting standard
setters can make information easier to use, it's going to
be more likely to be used.
It's not just a function of, let's put some
information in a report.
Let's put it in alphabetically.
That's not very helpful.
Let's put it in, in a fashion that is more easy to digest.
Something that's useful, not something that exists.
In a sense, it is like a fine print situation.
The question is, you've got a full and active life.
How much of the background, how many times do you install
software and say, I agree?
We did this work in the late 1990s.
And it's only here, now, in 2011 or so that we're actually
getting changes in financial reporting standards.
All companies are going to report, in
the very near future--
you're going to see a change in company's income
statements.
They're going to end with net income and immediately follow
with an additional set of lines that run through the
elements of other comprehensive income.
And they're not being highlighted, they're just
being made more accessible.
Because they're not in the back pages.
They're going to be on the front page of the newspaper,
rather than buried in the classifieds.
One wouldn't expect a single study to
immediately impact practice.
It would have to be a very, very earth shattering study.
But, over time, people in the academic community.
People in the practice community, start paying
attention to our study.
To studies that were parallel with it.
To studies that supported different aspects of it.
As this body of research grew that essentially came down and
said, how we present information does make a
difference.