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Miia Karilainen
Usefulness of Financial
Accounting Information in Commercial Lending
By Banks in Sweden
Business Administration Master’s Thesis
30 ECTS
Term: Spring 2014
Supervisor: Per-Ola Maneschiöld
I
Acknowledgement
First, I would like to thank my supervisor Per-Ola Maneschiöld, for his
guidance and assistance in my master thesis. In addition I would like to thank
all the other professors at Karlstad University, who were encouraging and
inspiring and providing necessary background to conduct this thesis.
Second, I would like to thank all the questionnaire survey participants, who are
working in the largest commercial banks in Sweden.
Third, I would like to thank my family and friends, who have been an
additional source of motivation. The support from fellow students is
meaningful during the whole master thesis semester.
Karlstad, 2014-6-5
Miia Karilainen
II
Abstract
Recent research has focused more on the needs and usage of accounting
information in favor of its investors. Hence, there has been less attention
towards creditors’ information needs. Additionally, it has been criticized that
accounting information has lost its relevance to its users (Francis & Schipper
1999; Hail 2013). As Allen and Cote (2005) stated, it is hard to make any
improvements to financial reporting if creditors’ decision making behavior is
not well investigated.
Thus, the aim of this research is to narrow the gap between studies concerning
the information needs and usefulness of accounting information among
creditors and investors. In addition, the companies in Sweden are financing
their operation by issuing debt rather than equity, which increases the
importance to consider creditors’ information needs, and how useful
accounting information is to them (Billings & Morton 2002; Ewing & Bhatia
2012).
The data was collected through questionnaire surveys which were sent out to
the branch managers of the biggest commercial banks in Sweden. The
questionnaire was mainly based on questions that used five point likert-scale.
Additionally, a few open questions were included.
Overall, the results of this thesis indicate the consistency with recent research.
The importance of accounting information is significant, and practically all
three main statements; balance sheet, income statement and cash flow
statement, can be regarded to be complementary. An obvious difference is in
the usage of financial statements compared to other information sources, as
respondents claim to use accounting information nearly all the time when
other sources were significantly less used.
Key words:
Financial Reporting, Accounting Information, Commercial Lending
Stakeholder Theory, Efficient Market Hypothesis, Signaling Theory,
Institutional- and Legitimacy Theory
III
Abbreviations
BAR Behavioral Accounting Research
BS Balance Sheet
CFS Cash Flow Statement
EDA Explanatory Data Analysis
EMH Efficient Market Hypothesis
FASB Financial Accounting Standards Board
GDP Gross Domestic Product
IAS International Accounting Standard
IASB International Accounting Standards Board
IFRS International Financial Reporting Standards
IS Income Statement
M&A Mergers & Acquisitions
MBAR Market-Based Accounting Research
MFIs Monetary Financial Institutions
ROA Return On Assets
ROCE Return On Capital Employed
ROE Return On Equity
UN United Nations
IV
List of figures
Figure 1: Players on the financial market December 2011 (Swedish Bankers'
Association 2013) ........................................................................................................2
Figure 2: Illustration of banks various sources of funding and the risk of
contagion effects (Sveriges Riksbank 2013). ...........................................................3
Figure 3: Marginal value cost of information. ...................................................... 12
Figure 4: Stages for valid and reliable questions (Saunders 2009, p 372) ......... 26
List of tables
Table 1: Background information .......................................................................... 28
Table 2: Information sources and the percentages of total amount of
respondents. .............................................................................................................. 29
Table 3: Information sources and the rank order. ............................................... 30
Table 4: Financial accounting information and the percentages of the total
amount of respondents. .......................................................................................... 31
Table 5: Financial accounting information and the rank order. ........................ 32
Table 6: Useful approaches and the percentages of the total amount of
respondents. .............................................................................................................. 33
Table 7: Useful approaches and the rank order. .................................................. 33
Table 8: Parts of annual reports and the percentages of the total amount of
respondents. .............................................................................................................. 34
Table 9: Parts of annual report and the rank order. ............................................ 35
Table 10: Concluding questions and the percentages of the total amount of
respondents. .............................................................................................................. 35
Table 11: Concluding questions and mean values. .............................................. 36
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Table of Contents
Acknowledgement ...................................................................................................... I
Abstract ...................................................................................................................... II
Abbreviations............................................................................................................ III
List of figures ............................................................................................................ IV
List of tables .............................................................................................................. IV
Table of Contents ..................................................................................................... V
1. Introduction ........................................................................................................ 1
1.1. Background .................................................................................................. 1
1.2. Problem discussion ..................................................................................... 3
1.3. Research purposes and objectives ............................................................ 5
1.4. Research aim and research questions ....................................................... 5
1.5. Structure of the study ................................................................................. 7
2. Theoretical Framework...................................................................................... 8
2.1. Institutional- and legitimacy theory .......................................................... 8
2.2. Stakeholder theory ...................................................................................... 8
2.3. Signaling theory ......................................................................................... 10
2.4. Efficient market hypothesis ..................................................................... 11
3. Financial Reporting and user groups ............................................................. 13
3.1. Financial Reporting................................................................................... 13
3.2. Financial Statements ................................................................................. 13
3.3. User groups of Financial Reporting ....................................................... 14
3.4. Main user groups and the use of accounting information .................. 15
3.5. Empirical evidence of the Use of Financial Statements ...................... 18
4. Methodology ..................................................................................................... 21
4.1. Research philosophy ................................................................................. 21
4.2. Research approach .................................................................................... 21
4.3. Choice of method ..................................................................................... 23
4.4. Data collection and sample selection ..................................................... 23
VI
4.5. Questionnaire design ................................................................................ 24
4.6. Research quality ........................................................................................ 25
4.7. Data analysis .............................................................................................. 26
4.8. Limitations ................................................................................................. 27
5. Results ................................................................................................................ 28
5.1. Background ................................................................................................ 28
5.2. Information sources ................................................................................. 29
5.3. Importance of financial accounting information ................................. 31
5.4. Useful approaches .................................................................................... 32
5.5. Annual report ............................................................................................ 33
5.6. Easiness to use and general importance of financial statements ........ 35
5.7. Improvements in accounting information ............................................ 36
6. Analysis .............................................................................................................. 37
6.1. Importance of financial statements and information sources ............ 37
6.2. Annual report and the importance of cash flow .................................. 39
6.3. Importance of financial accounting information ................................. 41
6.4. Useful approaches .................................................................................... 43
6.5. Concluding opinion about the common importance and ease of using
financial statements .............................................................................................. 44
6.6. Additional information need ................................................................... 44
7. Conclusion ........................................................................................................ 46
7.1. Reflections ................................................................................................. 46
7.2. Future Research ........................................................................................ 48
References: ................................................................................................................ 49
Appendix ................................................................................................................... 55
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1. Introduction
This chapter provides an introduction to the research topic. First, the
background and research problem is discussed. A brief concluding subchapter
about the research purposes and objectives are presented as well as the
research aim and research questions. The last paragraph introduces the
structure of this research.
1.1. Background
The economic welfare system in Sweden is well known in the world and has
been recognized as a good role model for other nations. It has been developed
over the time and stands for a social, political and economic equilibrium.
According to the Human Development Report by the UN, Sweden was
ranked seventh (UNDP 2013) which indicates the high quality of life. In 2014,
Sweden’s gross domestic product (GDP) was estimated to grow 2, 5
percentage and the following year 2015 3, 3 percentage which is the fastest
growth in the Nordic region1 (European Commission 2014). Sweden has been
aiming for full employment with equalitarian labor income, which then
expands the tax base that facilitates the high budgetary expenses (Cerra et al.
2003). In order to get the economic system working to its full potential, there
are many areas that have to be aligned.
According to Sen (2013), the basic idea behind the economic growth is that
over a long time, there is a continuous increase in per capita incomes. From
an economic point of view, the welfare is driven by business growth, which on
the contrary, is driven by mergers and acquisitions (M&A) or other financial
activities. Demand-led growth is driven by the consumer’s and the customer’s
increased demand for products and services (i.e. more frequent buying cycle
and greater quantities). Generally, companies use different marketing tools in
order to boost their business and increase their growth (Bird & McEwan
2012). In order to increase the growth, companies need financing and this they
acquire with good signals, i. e. with good financial accounting information that
reach potential capital providers.
Growth benefits all stakeholders, as companies can provide more products
and services for customers, employee benefits, better career opportunities,
1 Nordic region: Denmark, Finland, Norway and Sweden
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shareholder’s gains, greater returns and trade customers. Through this,
partners and suppliers can achieve better commercial benefits and it improves
the overall welfare for social communities (Bird & McEwan 2012). Thus, it is
beneficial to improve the nation’s economy in order to improve the welfare of
the county’s citizens.
In order to boost the economy, expand the business, and invest in M&A,
companies need financial capital. In Sweden, there are two primary source of
financing; either through issuing a debt or equity. Today’s trend is to finance
the operation rather through debt than equity (Billings & Morton 2002) as it is
also in Sweden. The companies in the nation arrange their finance 80 percent
through debt compared to the US, where finance through debt counts for 30
percent (Ewing & Bhatia 2012). In order to reach potential financing sources
companies need to signal their performance to potential providers.
To get the economy to grow, it is essential to have functional systems for
saving, financing, payments and risk management. The system is formed of
different parties, such as banks and other credit institutions, insurance
companies, securities companies and other parties in the financial sector. The
following figure presents the players of the Swedish financial market in 2011
(Swedish bankers’ association 2013).
Figure 1: Players on the financial market December 2011 (Swedish Bankers' Association 2013)
Banks represent the most significant part of the parties in the financial market.
Other main players are mortgage institutions and insurance companies. In
2011, banks share of total assets of the financial market was 40 per cent
(Swedish bankers’ association 2013).
The figure below illustrates banks’ sources of funding, including Swedish and
international financial institutions. It implies that banks are dependent on
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several sources of funding. The contagion risk exists as banks funding sources
are dependent on other sources and thus there is a strong interdependence
between involved parties. Banks’ core business is to provide credit and accept
deposits. The deposits mainly (43 per cent) come from Swedish households,
Swedish companies (24 per cent) and foreign public (23 per cent). The
financial sector has a main role to channel the savings into investments
(Sveriges Riksbank 2013).
Figure 2: Illustration of banks various sources of funding and the risk of contagion effects (Sveriges Riksbank 2013).
1.2. Problem discussion
Creditors (i.e. banks) have an important role in the credit market, and as they
are the major actors in the economy it is important to understand their
operation (Dell’ariccia & Marquez 2006). There has been little research about
the information needs in a favor of creditors (Allen & Cote 2005, Billings &
Morton 2002). Accounting information has an important role in market-based
economies, and for creditors and investors, the data is essential. Firstly, it
allows investors and creditors to estimate the possible return on their
investment opportunities and secondly, to monitor the use of capital once
committed (Beyer et al. 2010). Analyzing companies’ accounting information
has been an important tool for decision makers as creditors, investors,
business analysts and financial managers are utilizing the data when assessing
the performance of companies. Financial ratios are used when analyzing the
financial standing of company (Kwok 2002; Delen et al. 2013).
Additionally, the emphasis nowadays on information transparency increases
the motivation to understand further the creditors’ use of accounting
information. As Yap (1997) investigated, financial statements play an
important role when creditors decide to begin lending. The results implied that
financial statements were more frequently used than other sources of
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information when assessing the stage of the company. Additionally, the
research implied, that the most influencing statement has been income
statement, second was the balance sheet and the third was cash flow
statement. As the shape of business and credit progresses, they change to align
with the world’s circumstances. It is essential to examine whether financial
statements still are the primary source of information and whether the rank
order of these statements has remained the same. When knowing the most
important information, it is easier to focus on its presentation. The research is
going to investigate which one of the statements is the most frequently used
and essential for creditors in their credit lending process. The expectation is
that all three statements are used by creditors when deciding to pursue
commercial lending. It is also assumed that one of these three statements will
play a more important role than the other ones. Inter alia Yap (1997), and
Alattar and Al-Khater (2007) investigated the rank order of financial
statements. In addition there has been research that examines whether the
accounting information has lost its relevance. Inter alia Hail (2013) stresses the
overall relevance of the balance sheet has remained stable, but the loss of
relevance of income statement has become current. This indicates the need for
further research. The research aim is to focus on the usage and the usefulness
of accounting information, which are important matters when discussing the
improvements of financial reporting and which information really is relevant
to its users.
For the purpose of efficient market, accounting information has to be relevant
(Adel-Khalik 1972). It has been criticized that accounting information has lost
significant part of relevance to its users. The critic has increased the amount of
researches with goal to improve the accounting information (Francis &
Schipper 1999). However the aim of this research is not to suggest any
changes to accounting information. Rather, the aim is to discuss and find out
the usefulness of accounting information. As Allen and Cote (2005) stated, it is
hard to identify changes that improve current reporting system, if creditor’s
decision-making behavior is not well investigated. Thus, it is important to
understand and keep up to date with recent research. The usefulness of
accounting information, as a favor of creditors might initiate discussion,
whether there are changes to be made according to financial reporting.
Additionally Watts (2006) stated that if the accounting information is not
useful, it could lead to the private accounting and financial system.
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1.3. Research purposes and objectives
One of the conspicuous matters in existing literature is the lack of attention
towards creditors’ use of accounting information. Recent research has focused
more on the information demand of investors and thus ignored the needs and
interest of creditors (Allen & Cote 2005; Billings & Morton 2002). This
research is going to narrow the gap by investigating which information and
information sources are most useful in commercial lending and how they value
the financial statements.
The lending decisions in this research are comprised of only the commercial
lending decisions, excluding mortgages and personal loans. Commercial loans
focus more on accounting information and thus serve the purpose of this
research better. The purpose of this paper is to fill the gap in this field as the
usefulness of accounting information in favor of creditors is poorly researched
as looking for investors.
Nowadays companies acquire more financing through issuing debt instead of
equity (Billings & Morton 2002; Ewing & Bhatia 2012) increasing the
importance of examining creditors’ interests better. This research is going to
be accomplished in Sweden where financing through debt than equity is more
common. Hence, in Sweden creditors play more important role than investors.
In today’s business world banks have to act in a way which guarantees a safe
and efficient financial system (Dell’ariccia & Marquez 2006). The objective is
to understand the importance of accounting information related to other
information sources. Additional items, such as different assessment
approaches are investigated and analyzed to determine whether they are
important in commercial lending.
1.4. Research aim and research questions
The main aim of this research is to narrow the gap in the field by investigating
the creditors’ use of accounting information. The aim is to find out how likely
the accounting information is used as a primary source of information
compared to other sources of information. The sub-questions are specifying
the field further and when answering these questions, better conclusions can
be drawn. As with how companies in Sweden finance their operation
significantly more through issuing a debt than equity (Ewing & Bhatia 2012),
the importance towards creditors is justifiable. Literature review has indicated
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the gap in the recent researches between creditors and investors, as investors’
needs are more researched (Allen & Cote 2005, Billings & Morton 2002).
The results are going to imply the relative importance of accounting
information compared to other sources used by creditors. It is assumed that
financial accounting information is the primary source of information when
creditors decide lending. According to the demand to focus more on creditors’
usage of accounting information the following research question is suggested:
RQ: How likely is that creditors in Sweden use financial
accounting information more as a primary source of information
than other sources of information when making credit decisions?
The research is going to answer the following sub-questions in order to find
out more about the usage of accounting information. It is assumed that
financial statements are the most important information source for creditors in
commercial lending. As the importance of cash flow information appears
continuously in accounting research, this paper is going to investigate its
usefulness compared to other financial accounting figures. Additionally the
aim is to investigate whether the importance of financial statements differ a lot
from the other parts of annual report. In the literature review few approaches
such as the five Cs approach and trend analysis, appeared as important tools
when assessing the companies’ financial standing. Thus they are included in
the thesis as the usefulness of these approaches is investigated.
1: What is the rank order of the usefulness of financial statements
and how does the usefulness differ according to other
publications in annual reports?
2: How important are different parts in annual report and how
much different parts influence creditors’ lending decisions?
3: How important the cash flow is for creditors compared to
other financial accounting information?
4: Which financial accounting information is most useful for
creditors?
5: How useful are different approaches in credit lending?
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1.5. Structure of the study
Chapter 1 presents the background for this research and trough problem
discussion the motivation to study this field is defined. Additionally the
chapter introduces research purposes, the aim of this research and research
questions.
Chapter 2 begins with theories that provide framework for this research.
Institutional- and legitimacy theory explains that accounting information is
released as a pressure of competitive environment, stakeholder theory explains
why companies focus on creditors, signaling theory why companies signal
about its accounting information and efficient market hypothesis that markets
react for all the available information. All these theories are used to explain
what the environment between companies and creditors look like and why
they act in a certain way.
Chapter 3 presents the definitions of financial reporting and financial
statements. The main users of these releases are defined and the information
needs of the two main user groups are discussed. The last paragraph looks at
recent research in this field and states some main findings based on recent
literature.
Chapter 4 looks at methodological matters using the research philosophy.
Data collection method as well as the design of data collection are presented in
this chapter. Chapter four consider the research quality and possible
limitations of this research.
Chapter 5 presents the findings of this research. In order to present the data,
tables are used. The main tool used to create these tables and work with the
data was the survey&report tool provided by Karlstad University as well as
Microsoft Excel.
Chapter 6 uses the information in chapter two and three as well as the
research results of this paper in order to draw an analysis. The analysis is
answering to the research questions presented in chapter one.
Chapter 7 concludes this paper with final reflections. Additional ideas, that
came up through this research project concerning future research in this field
are presented.
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2. Theoretical Framework
Second chapter provides the theoretical framework for this research. The
following accounting theories draw clear lines to this field and explain why the
environment between accounting information providers (companies) and
creditors is the way it is. The theories help to understand why companies and
creditors act how they act.
2.1. Institutional- and legitimacy theory
Institutional theory explains the behavior of the company. The strategic
choices are made in favor of the stakeholder and a company’s legitimacy is
based on the beliefs which derive from the interactions between a company
and its environment. Hence, it is important to take different stakeholder
interest to account. Additionally, institutional theory explains the accounting
choice of the companies. The theory states that companies adopt systems and
management practices that are considered legitimate by other companies in the
field. Companies are answering to the pressures that are coming from their
institutional environment as well as making choices that are socially accepted.
Companies need external financial resources which influence on companies’
choices (Moore et al. 2012). Additionally accounting has been seen as a symbol
for legitimacy (Carpenter & Feroz 2001).
The theory implies, that because of the pressure of external environment,
companies relies accounting information that is most favorable for their
stakeholders. External environment include other companies that are
operating in the same field and as they are aiming on the same goal to reach
the potential creditors and ensure liquidity, the competition is hard. Hence,
external environment effect on companies’ behavior and choices.
2.2. Stakeholder theory
Stakeholder theory is one of the most known theories in the field of business
management. The theory, originated by Freeman (1984), implies that the focus
should be rather on stakeholders instead of just shareholders. Stakeholder
theory has increased the attention towards the importance of the relationship
between companies and stakeholders. It is obvious that companies cannot
cope without their stakeholders and they are heavily dependent on these
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constitute groups. The approach focuses on creating value for stakeholders
and has stated to be a more long-term orientated procedure than only a
shareholder approach. The main concern in stakeholder approach is to target
benefits and direct important decision-making to stakeholders. Companies
should benefit as well as exact costs from stakeholders (Ayuso et al. 2014;
Phillips 2003; Stieb 2009). The core of the theory emphasizes going beyond
stakeholder thinking and address the stakeholders’ perceptions. The theory
includes an idea about who has input in decision-making and who benefits
from the outcome. The discussion generally leads to the decision about the
distribution of the financial outputs as stakeholders are seeking compensation
for their investment (Phillips 2003).
According to stakeholder theory, the main responsibility of a company is to
maximize returns to its stakeholders. Stakeholder approach is a tool to develop
strategies, reach corporate goals and stress cooperative (Roberts & Mahoney
2004). It is crucial for companies to have strong relationship with their
stakeholders as today’s business life is considerably more chaotic, complex and
dynamic than earlier times. According to Ayuso et al. (2014) major
stakeholders are employees, creditors, suppliers, customer and the local
community. Nowadays there is a significant increase in in co-operation in
forms of strategic alliances, long supply chains, joint ventures and virtual
networks (Andriof et al. 2002).
Stakeholder theory develops a framework for this research as it theorizes the
accounting role in creditors’ decision-making. Stakeholder approach
exemplifies why the focus is on accounting information. It implies that
companies release information in order to serve its stakeholders as well as
reach own goals, i.e. ensuring cash. Companies signal through accounting
information to its stakeholders, which is used as a strategic tool by companies.
In Sweden, creditors represent a significant stakeholder group for companies,
which increase the importance towards creditors and especially to consider
their primary needs. In Sweden, the companies finance their operation rather
through debt than equity (Ewing & Bhatia 2012), which indicates the
importance of proactive stakeholder engagement. By means of this research
the wishes of the stakeholder group are taken into account as the creditors’
information need concerning the accounting information is investigated.
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2.3. Signaling theory
In order to serve stakeholders and focus on stakeholder approach, companies
need to signal to their associates. With regard to signaling theory, it can be
understood why companies release signals to its stakeholders. Firstly, signaling
theory describes behavior when two parties have access to different
information. The sender (in this case company) usually chooses whether and
how to signal the information and another party, the receiver (this case
creditor) chooses how to interpret the information. Hence the signals focus on
the information needs of the users. Secondly, theory describes the information
asymmetry between parties, which can be reduced via signaling; the party
which has more information signals it to others (Dainelli et al. 2013; Morris
1987). Annual report has stated to be the most reliable way to communicate
between two parties (Dainelli et al. 2013). Commonly, managers have more
information about the company’s current profitability and the actual and
future investments. This information asymmetry hinders the situation inside
capital providers as they might under- and over-price companies’ profitability.
This has potential to lead to market failure (Beyer et al. 2010) as well as to bad
debt problems and cash liquidity problems (Mirtalaei et al. 2012).
Additionally signaling theory explains why companies voluntarily report
accounting information as signaling good accounting information lowers the
cost of capital. If creditors cannot access the information about the financial
standing of the company, they would likely require higher cost for capital. As a
conclusion, accounting information can be seen as a tool to reach creditors in
order to lower the cost of capital. Additionally Allee and Yohn (2009) found
out that companies that report accrual-based accounting information pay
significantly less for credit than the companies without this practice. Another
research study pointed out that the cost of debt is lower for audited companies
(Minnis 2011), and the cost of capital can be influenced by affecting the
accuracy and quantity of information available (Easley & O’hara 2004). If
companies would not report at all, it would signal bad financial standing,
which explains why companies signal accounting information even if they have
slightly bad figures. To not to report at all would signal bad financial standing
(Wolk et al. 2013). Dainelli et al. (2013) investigated the situation between
companies with uneven performance and concluded that more profitable
companies signal more information in their annual reports.
Signaling is costly for companies (Breyer et al. 2010; Morris 1987), which
increases the importance of releasing correct accounting information and
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avoiding useless information. Correct signaling strategies should be drawn in
order to avoid costs. Signaling theory has been commonly used in accounting
research. This research can be based on the theory and premise that
companies signal through accounting information, in order to reach creditors
with the intention of lowering the cost of capital. Companies try to reduce the
information asymmetry (Morris 1987) via releasing accounting information as
well as increasing stakeholder value. Banks are trying to reduce information
asymmetry through using several information sources, such as the accounting
information. Additionally, banks can cooperate, and share information with
other banks, to reduce the information asymmetry (Dell’ariccia & Marquez
2006). For the purpose of this research signaling theory explains why
accounting information is released by companies and why banks utilize the
information. Signaling theory pays attention to annual reports, which are an
important tool when reducing information asymmetry between two parties.
Additionally standard-setters such as IASB and FASB prescribe standards
which require companies to signal certain performance measures (Dainelli et
al. 2013). In order to be attractive, these market signals have to be relevant for
decision processes (Breyer et al. 2010). Efficient market hypothesis (EMH)
explains further how much of the available information is utilized and why
creditors do not acquire all of the information.
2.4. Efficient market hypothesis
The EMH states that markets react based on all available information; such as
how accounting information would impact stock markets as well as the
operations of the securities market. The market reaction to accounting
information does not only reflect the properties, but indicates the relevance of
accounting data. Abdel-khalik (1972) states in the article that because EMH
and accounting information are related to each other and the market reacts to
accounting numbers, accounting procedure and systems are generally a good
base. However, accounting output could be improved. Thus, the theory
implies that relevant accounting data is essential for efficient markets.
The statement that markets react for all available information can be
interpreted as follows: there are actors who are trying to maximize their wealth
by trading, and when the publicly available information can be accessed at the
same time, all the wealth-maximizing actors rapidly analyze the information
and trade accordingly. It is highly assumed that security prices change, in other
words markets react to the information (Wolk et al. 2013).
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Theory indicates that creditors use all the available information when deciding
their lending practices. Additionally, under EMH another aspect has to be
taken into account, which is the marginal value of cost of information.
Creditors might need to weigh whether certain information brings value for
their operation or whether the marginal cost of information is higher than the
real value of the information. This situation is illustrated in the figure below,
where the y-axis represents the relative information value and the x-axis the
cost of information. The information that has highest value is commonly
easiest to access and is thus less costly. Creditors base their lending using the
information with highest value and less costly. Next creditors utilize the
information that has second highest value but is slightly more costly, and so
they continue until the marginal value of cost of information and information
value for creditors cross. At this point creditors stop acquiring any further
information, as the cost of information is greater than the value of the
information.
Figure 3: Marginal value cost of information.
On the other hand it has been criticized that the financial market never
reaches a state of equilibrium. Circumstances change and people usually act
according to the newest information that is available. In other words, people
are moving towards an equilibrium target, but the target is continually
changing. People are already acting according to new information before old
information has been fully acted upon (Sharpe 2008).
13
3. Financial Reporting and user groups
The third chapter provides an overview of financial reporting and user groups.
The focus is on the two main user groups of financial reporting. The last
subchapter provides and extensive overlook at what has already been done in
this field.
3.1. Financial Reporting
The financial Accounting Standards Board’s (FASB) Statement of Financial
Accounting Concepts No. 1 and IFRS framework (IASB) defines the purpose
of financial reporting as necessary to provide information that is useful in
making business and economic decisions. The information should be relevant
for investors and creditors and it should help them to evaluate:
‘the amounts, timing, and uncertainty of prospective cash receipts
from dividends or interest and the proceeds from the sale,
redemption, or maturity of securities or loans’ (FASB 1978).
Additionally the information should include economic resources and, the
claims to them (FASB 1978; IASB 2013).
According to IASB, financial reporting has two qualitative characteristics;
relevance and faithful presentation, which indicate the usefulness of the
information. Relevant information has predictive or confirmatory value or
both, where predictive value denotes the ability to predict future outcomes and
confirmatory value provides feedback about previous predictions. Faithful
representation is free from errors, and is complete and neutral. Neutral
information does not mean that the information would not have an impact on
decisions, and being free from error does not necessarily mean accurate. When
qualitative characteristics are enhanced, they enhance the usefulness of
information. For example, when comparability is improved, this enables users
of financial reporting to understand and identify similarities and differences
among items. When enhancing the understandability, the information is
presented and explained as clearly as possible (IASB 2013).
3.2. Financial Statements
According to IAS 1 it can be concluded that the three main statements are
statement of financial position, statement of profit or loss and other
14
comprehensive income, and statement of cash flows. Additionally, standards
require a statement of changes in equity, which traditionally is not a financial
statement in many countries. IAS 1 does not prescribe any detailed layout for
the statement of financial position but does identify items that have to be
presented in the statement. One important obligation is to separate current
and non-current assets, and current and non-current liabilities as a separate
classification (IASB 2013). The statement includes three important
components; assets, liabilities and owners’ equity. Statement of financial
position commonly provides the information that helps to assess the financial
health of a company (Wolk et al. 2013). Statement of profit or loss and other
comprehensive income present the information as follows: profit and loss
account +/- other comprehensive income = total comprehensive income. IAS
1 allows that these two sections, profit or loss and comprehensive income, can
be presented in two separate pages (Walton 2011). The statement also includes
important facts such as the level of revenue and expense the company has
generated. The statement of cash flow provides cash flow information which,
according to IAS 7, demonstrates the company’s ability to generate cash and
cash equivalents; this information is further divided into operating-, financing-
and investing activities (IASB 2013). The fourth main statement, according to
IASB, identifies changes in equity, thus showing the reconciliation between the
opening and closing amounts (Walton 2011).
The objective of financial statements is to provide information about a
company’s financial position, performance and changes in financial position
that users need when they make economic decisions. The purpose of the
statements is to meet the common needs of users, which often include the
information about at company’s ability to generate cash and cash equivalents
(IASB 2013). IAS 1 prescribes the general purpose of financial statements
which is to meet the needs of users. The statement must combine all the
information regarding assets, liabilities, equity, income and expenses (including
gains and losses) and cash flow which are essential for users in order to make
economic decisions (IASB 2013).
3.3. User groups of Financial Reporting
According to FASB’s Statement of Financial Accounting Concepts No. 1
(1978) the users of financial reporting are generally owners, lenders, suppliers,
potential investors and creditors, employees, management, directors,
customers, financial analysts and advisors, brokers, underwriters, stock
15
exchanges, lawyers, economists, taxing authorities, regulatory authorities,
legislators, financial press and reporting agencies, labor unions, trade
associations, business researchers, teachers, students and the public.
Creditors, owners and employees have a direct economic interest in particular
companies as they are interested in the company’s ability to generate cash. The
company is the source of cash for investors, lenders, suppliers and employees
in the form of dividends, interest, payment for goods and services or wages
and salaries. Users expect to be compensated for their investments (FASB
1978). According to the definition provided by Wolk et al. (2013), the two
primary user groups of accounting information are creditors and investors.
Generally creditors focus on facts and numbers as they are estimating the
customers’ ability to repay loans and contrary investors focus on information
which estimate their potential for return on their investment.
3.4. Main user groups and the use of accounting information
Financial reporting and financial accounting information has an important role
for creditors and investors. Financial statements provide valuable information
about the current financial position, the changes in financial position and
company’s overall performance. Users of financial statements analyze all of the
available information for their decision-making process. There is a lot of
information such as profit before tax, gross profit, non-current assets and
current assets but these figures are not always valuable without a comparison.
Financial ratios are calculated in order to serve the information needs for the
future as well as facilitate the decision process. The most frequently used ratios
that indicate the profitability of the company are return on equity (ROE)2 and
return on assets (ROA)3, although return on capital employed (ROCE)4 is also
used. The annual report provides information from two consecutive years and
trend analysis explores the company’s performance for a longer period of time
(at least five consecutive years with a possibility of a ten year frame).The
choice of base year in the analysis is important as all of the items in the
financial statements are expressed as an index to that year (Alexander et al.
2009; Talebnia et al. 2012).
Creditors are part of the monetary financial institutions (MFIs). Sveriges
Riksbank (2013) add banks, mortgage institutions, financial companies,
2 Profit / Equity
3 (Profit before taxation + Interest) / Total assets
4 (Profit before taxation and long-term loan interest) / Net assets (Alexander et al. 2009)
16
municipal and corporate-financed institutions, monetary securities companies
and monetary investment funds (money market funds) to the MFI definition.
MFIs play an important role in the economy as they are expected to screen out
applicants who do not meet the lending standards. Failure in this field would
lead to weaker stability of credit markets. The reduction of lending standards
might result in lower profitability of banks as well as higher aggregate credit
and increased vulnerability to macroeconomic risks (Dell’ariccia & Marquez
2006). Companies generally need financing and bank loans for mergers and
acquisitions (M&A) but after the credit crisis 2008, to get a loan has become
more challenging (Sagner 2013). The economic slowdown has increased the
factors that creditors need to assess before allocating credit.
Creditors use the accounting information of a company to determine whether
it is able to pay interest in the short term, and especially the ability to repay the
loan at the expected day. Creditors look for additional loan security in the
form of assets and other valuable items that are noted on financial statements
and could be sold in order to obtain cash and repay the debt (Wolk et al.
2013). Making credit decisions commonly can be a challenge for creditors and
therefore an established procedure to investigate new borrowers and monitor
old customers is valuable to avoid credit risks. MFIs often focus on the Five
Cs approach when they decide the lending. This approach includes analysis of
character, capacity, capital, conditions and collateral, which are based on
accounting information (Beaulieu 1994; Business credit 2011; Kwok 2002).
Some creditors also include ratio analysis, cash flow sources and analysis of the
company’s loan plans to the five C approach (Kwok 2002). The Five C
approach provides a framework for creditors as well as structure to their
judgments. In the procedure, character stands for integrity, stability and
honesty while capacity is analyzed through financial statements. In order to
determine capital, creditors analyze the amount of equity investment and how
efficiently these investments are used to generate cash flows. Accounting
information is the primary source used to determine the capital (Beaulieu
1994). All external events and factors that might disturb the normal business
cycle are evaluated under the condition section of the approach. If providing
credit to a customer who operates internally, supplementary conditions such as
the stability of the foreign country and currency rates should be considered. It
is important to creditors to know the industry cycles in this stage. Collateral is
defined as property that is used as a security for debt repayment (Business
Credit 2011) and it usually includes asset valuation. It has claimed that
17
collateral alone is not enough to justify making a loan and should be used
when there are weaknesses in other areas of the Five C model (Beaulieu 1994).
The issue of bad debt has increased the importance of assessing the potential
customers regularly. Accurate company assessment helps creditors to avoid
significant losses. Nevertheless companies as well as banks are suffering from
cash liquidity problems. Consequently it drew attention within researchers and
sparked the interest to research credit lending decisions (Mirtalaei et al. 2012).
The Basel Committee has noticed the problems that banks are facing
nowadays and emphasize the importance to manage the credit risk exposure
under the credit lending. Too little risk-taking might hinder the economic
growth but on the other hand too much risk threatens the economy (Arora
2013).
Besides creditors, the other main user group of accounting information is
investors. Generally they are shareholders who need the accounting
information when they examine the value of the company’s shares in their
capital allocation progress (Wolk et al. 2013). Environment where investors
make decisions are full of investment opportunities, hence it is important to
utilize appropriate expedient accounting information (Talebnia et al. 2012).
Generally investment decisions are based on annual reports which indicate
how much profit a company has made, how much worth the company is and
how the directors saw the year and how they see the future. All the
information is not useful so it is important to consider which information to
exploit and how. As cash flow information is important to creditors, it has
important matter to investors too. Cash flow signals future performance and
thus is useful information when estimating potential dividends. The predictive
value indicates the relevance of accounting information (Wolk et al 2013).
Aliabadi et al. (2013) stated that for investors accounting information is
relevant if it is making a difference in company value. The main concern
among investors is whether to sell, buy or hold shares but as there are
extensive investment opportunities, investors must first filter the available
information. Recent research concerning the investor decision-making
behavior reveals that accounting information carries the biggest influence.
Information asymmetry often leads uninformed investors to invest in
companies that are well known or that they deem as beneficial. Companies are
providing additional pieces of information through annual reports in order to
reduce the information asymmetry. According to Talebnia et al. (2012) a low
level of disclosure increases the cost of capital. By releasing more information,
18
companies reduce information asymmetry and extend the interest on shares
(Leuz & Verrecchia 2000).
3.5. Empirical evidence of the Use of Financial Statements
There are several studies about the usage of accounting information. The
inconsistencies in this field stem from the fact that investors’ usage has been
investigated more than creditors. Inter alia Wolk et al. (2013) states that
theories under the usefulness of accounting information are not well
developed when it comes to creditors. Stephens (1980; cited in Kwok, 2002,
p.351) examined the usage of financial statements in bank lending decisions
with the intention to increase the scope of decision process research.
This paper is going to investigate additionally the importance of financial
statements compared to other sources of information. Inter alia Sawalga
(2012) explored the most important information sources concerning the
investment situations. The results implied that according to the investors,
corporate annual reports are the most important source for the purpose of
investment decision-making. The following used sources were respectively
daily share prices, corporate websites, newspapers and magazines, advice of
friends, discussion with company staff, stockbrokers’ advice and tips, and
rumors. The research was conducted in Iran where according to the research
results, investors weighed more the usage of written information rather than
verbal information for the purpose of investment decisions (Sawalga 2012).
Another research about the importance of financial statements as a source of
information accomplished Yap (1997), which examined both, investors and
creditors. The results implied that even though the importance of cash flow
statement has been noticed, the statement has not become as a substitute for
balance sheet and income statement. The research implied that the most
influencing statement under credit decisions is income statement, second
balance sheet and the third cash flow statement. Alattar and Al-Khater (2007)
examined as well the usefulness of information sources in decision-making
process. They examined the importance of other sources not comparing them
to financial statements and thus not indicate how much more used financial
statements are compared to other sources.
Recent research has focused extensively on the importance of cash flow
information. Allen and Cote (2005) stated that the creditors’ primary focus is
solvency and secondary concern profitability. The information about liquidity
cash flows plays an important role for creditors as they try to identify
19
companies’ ability to generate cash flow from business as the main concern is
whether the customer is able to repay the loan. Thus, it is highly assumed that
creditors understand the operating cash flow (Allen & Cote 2005). Yap (1997)
investigated the importance and use of cash flow in lending decisions. The
results indicated the usefulness of CFS to make decisions especially concerning
liquidity, solvency and financial flexibility matters. Additionally many recent
studies (Catanach 2000; Cheng et al. 1996; Dechow 1994; Ingram & Lee 1997;
Jones et al. 1995; Minnis 2011; Yap 1997) indicated the importance of cash
flow, especially operating (Allen & Cote 2005) cash flow information when
assessing the financial stand of company. Cash flow information has been
used inter alia as an indicator of credit quality (Billings & Morton 2002). Kwok
(2002) investigated the usage of cash flow information and cash flow
statement in lending decisions. The outcome of the research exemplified that
during the lending process, not all of the cash flow information was obtained
from the cash flow statement. Other options to acquire the information were
through balance sheet notes and other reports (Kwok 2002). Allen and Cote
(2005) investigated whether the theories about the use of cash flow
information by creditors is true in practice. The outcome was that company’s
earning still dominates creditors’ decision-making. However, the income
statement has been seen as one of the most important sources by some
analysts as it provides the data which is used for forecasting subsequent
periods’ earnings (Ohlson & Aier 2009). It seems like all the statements are
essential for decision-making and can be regarded to be complementary
(Alattar & Al-Khater 2007; Yap 1997).
Inter alia Minnis (2011) investigated how financial statements influence debt
pricing. The results implied that audited companies have lower cost of debt
thus there is more weight on audited accounting information. Hence, it can be
assumed that creditors use auditors’ reports when they decide to offer a credit.
Gopalakrishnan and Parkash (1995) investigated the perception of accounting
information in lending agreements from the point of view of both, the
borrower and the lender. The results pointed out that debt-to-equity ratio and
tangible net worth covenants contribute to the technical default. The top three
factors in choosing accounting methods were ranked to be debt covenants,
industry convention and the level of reported income. Chung et al. (1993)
researched the creditors’ use of accounting information in the oil and gas
industry. They explored actual lending agreements in order to find evidence.
The results indicated, that especially in that industry, creditors highlighted a
need to obtain collateral for these loans.
20
Jones et al. (1995) researched the usefulness of accounting information from
the point of view of several users such as manager, investors and creditors and
findings indicated more frequent use of cash flow information for creditors.
Additionally, recent research has found that cash flow information has been
important for creditors as it estimates the future cash flows. When the
earnings and cash flows are positive the future cash flows are expected to be
positive and contrary if both are negative, the future cash flows are expected
to be negative (Barth et al. 1999; Sloan 1996). The estimation is important as
creditors are evaluating the companies’ ability to repay the loan (Billings &
Morton 2002).
Research in the field of the usage of accounting information has been
accomplished more from the investors’ point of view. Inter alia Barton et al.
(2010) investigated the most valued performance measure around the world by
investors. The results implied that investors all around the world do not value
the same measures the most but when it comes to the information of cash
flows, the information is relevant for all. Barton et al. (2010) suggested that the
standard setters should focus more on the information relevance instead of
concept of the best measure. Little research has focused on investigating
accounting information as a balance sheet and income statement numbers
have lost their relevance. The results pointed out that the overall relevance of
the balance sheet has remained stable but at the same time the loss of
relevance of income statement has become current (Hail 2013). The concern
of the accounting information relevance notably for creditors, investors and
managers has increased the importance towards researching the usefulness of
accounting information more. Lawrence (2013) examined individual investors
and concluded that they invest more in companies with clear and concise
financial accounting information.
21
4. Methodology
In this chapter the research approach and choice of method is explained. The
data collection progress and sample selection are shortly discussed.
Additionally research quality and limitations are considered.
4.1. Research philosophy
Philosophical aspects have to be taken into account when designing a research
method. All research methods are related to research philosophy and in order
to have a good understanding of the research; philosophical concepts have to
be at least somehow familiar. Key constructs in the philosophy are ontology,
epistemology, methodology, methods and paradigm (Eriksson & Kovalainen
2008). Two main types of research philosophy are ontology and epistemology
(Bryman & Bell 2007).
Ontology is a theory of the nature of social entities (Bryman & Bell 2007). It
concerns the relationship between people, society and the world. ‘What is
there is the world’ stands for the basic questions behind ontology. When
conducting research, what is worth to studying must be considered. The
ontology philosophy can be further divided into two aspects; objectivism and
subjectivism. Epistemology concerns the questions that ‘what is knowledge
and what are the sources and limits of knowledge’. In the research it is closely
related to the ontology claims, and thus they are often discussed together.
Epistemology refers the ways of acquiring knowledge and can be further
divided into two views; objectivist and subjectivist (Eriksson & Kovalainen
2008).
4.2. Research approach
Research traditions commonly are divided into deductive and inductive
reasoning. According to Bryman and Bell (2007) inductive theory comprises
the relationship between theory and research on commonest point of view.
First the theory is developed and then the researcher tests it with empirical
observation by using hypotheses in order to obtain an outcome. Deduction
reasoning state that theory is the first source of knowledge (Erksson &
Kovalainen 2008; Wolk et al. 2013). A large part of the research uses the logic
of hypothesis testing in the empirical world. It has been noticed to be lacking
22
and thus induction in research has gained more attention and stand (Eriksson
& Kovalainen 2008). Another approach, inductive reasoning consists of data
collection which is used when developing a theory. Research progress
develops theories from observations. Qualitative studies generally use the
inductive approach but some kind of deductive features can be combined.
Deductive and inductive approaches more clearly demonstrated (Bryman &
Bell 2007):
deductive: theory observations/ findings
inductive: observations/ findings theory
The approach of this research is combining both approaches. This is because
the theoretical framework has been build according to recent research as well
as books. Theoretical framework has been the basis when constructing the
empirical findings. After the empirical findings has been tested using
theoretical framework rather than testing the theoretical framework with
empirical findings. This approach show whether the findings are in line with
the theories and if it not, the research is developing a new aspect to the
existing theory.
Financial accounting research has focused on the reporting of business
activities already in long run. This is due to the fact that it is essential to make
a business accountable to its owners and creditors. It has been criticized that
accounting choices should be based on the needs of the users of financial
statements. As the focus of this research is on the one of the main user group
of financial statements, the favored objectives and approaches have to be
taken into account. Decision-usefulness approach implies two types of
empirical study; behavioral accounting research (BAR) and market-based
accounting research (MBAR). This research approach is BAR as the focus is
on the decision processes and decision outcomes of individual users. This
approach includes different methods such as surveys, field studies, laboratory
experiments and field experiments. The approach of this research is survey,
more specifically questionnaire survey as surveys commonly focus on attitudes
and opinions and has focus on information needs. Case studies are mostly
seen as small-sample studies, where a researcher selects a sample from the
population and draws conclusions by studying the sample. When looking at
the process from this perspective, case studies have a small sample from which
it is difficult to run any statistical tests (Ryan et al. 2002). Surveys are often
23
used in order to answer questions who, what, where, how much and how
many (Saunders 2009).
4.3. Choice of method
There are two common options for collecting information; through qualitative
or quantitative methods. The qualitative method produces any kind of results
that are not arrived by means of statistical procedure or other quantifications.
The quantitative method utilizes quantitative analyses of numbers or other
data that can be converted into numbers (Saunders 2009). Both methods have
advantages and disadvantages, so it is important to choose the most
appropriate one when looking for the research purposes, objectives and
research questions. For this research the combination of both methods was
the most appropriate choice.
This research includes mainly qualitative data which can be further termed as
categorical data. Qualitative data can be divided into ordinal and nominal data,
where ordinal scale indicates the rank order between categories and nominal
scale where categories cannot be ordered (Saunders 2009). The main part of
the questions uses ordinal scale.
In order to serve research purposes, the survey questionnaire method was
used to collect primary data. The questionnaire was developed to be online
and easy to answer in order to increase the willingness to participate.
Questions were developed so that they could best serve the research purpose
and accurately measured what they were supposed to measure. There was no
need to collect secondary data as it would not help for further understanding.
4.4. Data collection and sample selection
Quantitative and qualitative methods consist of different data collection
methods. The most convenient data collection method was an online
questionnaire. Respondents were selected by choosing the four biggest
commercial banks in Sweden which are Handelsbanken, Nordea, Swedbank
and SEB (Swedish bankers’ association 2013). The choice of the research
object was based on this information. The sample includes offices in the ten
largest cities in Sweden, as the commercial lending is larger part in bigger
cities. The choice to utilize the four biggest commercial banks in the ten
biggest cities in Sweden was based on the belief that including more examinees
would not be necessary; a smaller sample size would be sufficient to obtain a
strong understanding of the research questions.
24
The contact addresses were acquired online and phone calls were made during
the data collection to gain more respondents. In order to attract ideal
respondent, the research purpose and topic were briefly introduced in the e-
mail where the link to the online questionnaire was provided. Overall 18
branch managers replied, thus the data analysis is based on the answers of this
sample. The sample is sufficient and represents the creditors in Sweden as the
respondents were mainly branch managers, who are in response for
commercial lending for a larger area than just one city in Sweden.
4.5. Questionnaire design
It was essential to design the questionnaire in such a way as to collect the
required information for the research topic. The literature review and the
research plan indicate the right direction for the questionnaire. It is also
important to choose the right type of questionnaire. For the purpose of this
research, the self-administered questionnaire was the most appropriate one as
it is completed by respondent. Internet-mediated questionnaires are used to
increase the ease of response for participants (Saunders 2009).
The research questions and the aim were used when designing questions in
order to gain relevant data. There are different question types, which might be
either an advantage or a hindrance depending on the context of use. This
research includes a combination of different question types such as open
questions and ratings. Most of the questions are based on the five-point likert
scale, which indicates the strength of agreement. Likert scales are used to
locate the level of agreement and can be rank ordered, but how much more
respondents agree cannot be interpreted (i.e. choice five is not five times more
than choice one). Likert scales are useful when the wording of the questions is
correct (Bell 2010). Additionally, open questions were used as a part of the
questionnaire in order to acquire more detailed answers (Saunders 2009).
Developing the questions was a critical part of this thesis as there is a wealth
of research in this field. As a result it is important to develop questions that
are aimed to fulfill the research gap and produce updated research results.
One important aspect when designing the questions is the language, as some
respondents may understand questions in a different way than intended by
researchers. It is important to pre-test the questions in order to avoid
misunderstandings and ensure comprehension. Two university professors and
one fellow student read the questions, which also increased the research
quality. An untidy questionnaire will lose its impact even of it is carefully
25
prepared. In order to create a clear and concise questionnaire, the program
provided from the university was used.
4.6. Research quality
Regardless of method used to collect the data, it must be critically assessed for
reliability and validity. Reliability indicates whether the research results are
repeatable; it is the extent to which a research project produces the same
results under stable conditions (Bell 2010). When assessing the reliability of
this research it is difficult to determine how replicable the results would be due
to the fact that external factors might affect the respondents’ answers. It is
likely in this case that the reliability of banks and its employees is high as the
external factors should not affect their work.
More complex context is validity. Commonly it defines whether particular
questions really represent the concept they are supposed to and whether it
measures or describes what it is intended to. A reliable item is not necessarily
valid which in this situation means that research implies the same answers
different times but does not measure or describe what it is supposed to do
(Bell 2010). In order to increase the validity of this research, the questions
included in the online questionnaire need to be carefully designed. In order to
design the questions, extensive background work is done. It was important to
have a lot of knowledge about the subject and understand how accounting
information is used and why it is important for its users. In order to increase
the validity of this research and avoid observer bias, the research questions
were pre-tested. In order to test the understandability and language of the
questions, two professors who are working with financial reporting and one
fellow student read the questions through. In this way misunderstandings and
language problems were avoided and tested whether the questions measure
what they were supposed to from others point of view.
To focus on validity it is important to get the right people to answer the
questionnaire, which were the people who use accounting information in
lending processes. The focus was on the biggest commercial banks in Sweden,
which were obvious users of accounting information. The respondents have
been working in the biggest commercial banks in Sweden and are using
accounting information in their work and therefore it can be assumed to have
high validity in this research. When the validity is high, the conclusion should
apply for the whole population and not only for a part of it. As this research
validity is rather high, the sample did not have to be great. Another aspect that
26
affects to research validity is the participant error. This can occur for example
when the examinees are answering the questions at different times of the week
or after different occasion. It is not an issue in this research as it can be
assumed that respondents answer with truth no matter how the circumstances
are at the work when the answers are dealt anonymously.
Another fact that increased the validity was the easiness to answer the
questions and that the answers were dealt with high confidentiality and
anonymity. Answers were never connected to the respondents which indicate
to the respondents that they can answer truthfully. The following chart
presents the stages that have to occur in order to have a valid and reliable
question (Saunders 2009).
Figure 4: Stages for valid and reliable questions (Saunders 2009, p 372)
4.7. Data analysis
Surveying to collect data allows the collection of qualitative data that can be
analyzed by using descriptive and inferential statistics. The explanatory data
analysis (EDA) approach uses diagrams to explore and understand the data,
and thus is applicable for this research. This approach proposes the possibility
to look at previously unplanned analyze as an aim to gain new findings when
looking other relationships in the data (Saunders 2009).
Qualitative data comprises mainly categorical data which can further be
divided into descriptive and ranked data. Ranked data, i.e. ordinal data can be
rank ordered. The choice was to use five point likert scale which indicates the
strength of an agreement. According to the likert scale results, tables (notably
contingency tables) are used so that the data can be easily compared to each
27
other (Sounders 2009). For example, by comparing the frequency of usage of
certain information, it can be discovered whether the financial statements are
the most used information source for creditors when they decide to lend. To
describe the central tendency, mean, mode and median are advisable
measurements. Open questions are analyzed by using deductive and inductive
approaches. Based on the responses, key terms themes are identified and
analyzed and compared to existing literature. Afterwards, conclusions can be
drawn.
4.8. Limitations
One main limitation is the rather low response rate. According to Saunders
(2009) response rates for web based requests are likely to be really low and
thus non-response biases might occur. Additionally, it has been challenging to
obtain a representative sample. The limitation is in a substantial part of this
research as the response rate is rather low. Additionally, contacting the
examinees were difficult as banks do not always provide contact e-mails online
and when calling they are not showing willingness to participate surveys.
Another limitation was the language of the questionnaire. Even in Sweden the
English language skills are one the best in the world (Nylander 2013),
conducting a questionnaire in other than mother language might restrict the
willingness to participate. Even though the language skills are good, the
accounting terms and words might not be in everyone’s memory and it would
be time taking to start to translate them. Additional method limitation is the
online questionnaire, as creditors might not want to open an online link as
they cannot be sure of its security risk and they do not know who is really
behind the e-mail.
28
5. Results
This chapter provides a presentation of the collected data. In order to best
illustrate the results, tables are developed according to the collected data. The
main tool used in this section is Microsoft Excel and survey & research tool
provided from the University. In order to analyze the data, descriptive
statistics were used, namely frequencies and measures of central tendencies.
5.1. Background
Basic background information was collected in order to gain the necessary
information about the respondents. Females represent 38, 9 percent, while
males accounted for 61, 1 percent of total respondents. The respondents are
currently working in the largest commercial banks in Sweden and the offices
were located in the biggest cities, such as Stockholm, Gothenburg, Malmö,
Uppsala, Orebro and Helsingborg. In order to raise the reliability, respondents
are mainly the branch managers who are mostly responsible for a larger area
than just the city of the bank they are working in. The age distribution among
the respondents is distributed evenly among all of the age groups.
Additionally, information on the education background of respondents was
collected, and it was found that most of the respondents hold either bachelor
or master level degree. One fact that increases the research validity is the fact
that the majority of the respondents have more than 20 years of relevant work
experience in the field, in other words the experience will certainly help in
understanding the meaning and importance of the issues and thus the answers
are more reliable. The following table illustrates the main facts about the
respondents.
Background information % of the total amount of respondents
Age Relevant working experiment in the field Bank where I work is located
Under 26 5,6 % Up to 5 years 5,6 % Stockholm 29,4 %
26-35 11,1 % 6-10 years 11,1 % Gothenburg 11,8 %
36-45 22,2 % 11-15 years 16,7 % Malmö 23,5 %
46-55 33,3 % 16-20 years 0,0 % Uppsala 23,5 %
56-65 27,8 % more than 20 years 66,7 % Orebro 5,9 %
Over 65 0,0 % Helsingborg 5,9 % Table 1: Background information
29
5.2. Information sources
The following section investigates the most frequently used information
sources. The respondents were asked to indicate how often they use
information sources, such as media reports, financial statements, and
recommendations from others, industry information, trade associations and
other sources by choosing the most proper option according to how often
they use these sources. The aim of this question was to investigate the relative
importance of financial statements compared to other information sources.
The table below presents the amounts of in percentages of the total amount of
respondents that chose a particular option. The results implied that financial
statements were the most frequently used information sources as 84, 4 percent
of the total amount of respondents claimed to use the source all the time. The
difference between the use of financial statements and other information
sources is significant, as the second, most frequently used source was industry
information but only 17, 6 percent of the total amount of respondents claimed
to use the source all the time.
One respondent commented on the other source options and stated that when
assessing the possible new customer, creditors in Sweden are using UC, 5
which is providing business and credit information. Also, the internal
information shows how well the customer has served its current debt, and this
is used in lending decisions.
Information Sources % of the total amount of respondents
All the time Often Once in the while Seldom Not at all
Media reports 0,0 % 29,4 % 35,3 % 29,4 % 5,9 %
Financial statements 82,4 % 11,8 % 0,0 % 5,9 % 0,0 %
Recommendations from others 11,8 % 47,1 % 17,6 % 23,5 % 0,0 %
Industry information 17,6 % 47,1 % 23,5 % 11,8 % 0,0 %
Trade associations 6,3 % 31,3 % 25,0 % 31,3 % 6,3 %
Other sources 17,6 % 23,5 % 23,5 % 29,4 % 5,9 % Table 2: Information sources and the percentages of total amount of respondents.
The following table provides the mean values of the particular information
source. According to the mean values, the information sources were ranked.
The ranking indicates the order about which information source is most
frequently used in commercial lending process. The results implied that the
5 UC group: Offer reports as well as credit monitoring and qualified financial analysis. UC’s
database includes the information an all companies registered in Sweden (UC 2014).
30
most frequently used sources were respectively financial statements, industry
information, recommendations from others, other sources, trade associations
and media reports. The results provide empirical support that financial
statements have kept their position as a most used information source, i.e. the
results indicate the usefulness of accounting information in commercial
lending. Standard deviation indicates the dispersion and how close the data is
to the mean. The coefficient of variation is the relative standard deviation,
which indicates the extent of variability in relation to the mean (Hand 2008).
Information Sources
Rank Mean
Standard
deviation
Coefficient
of variation
Media reports 6 3,1 0,9 29,8 %
Financial statements 1 1,3 0,8 59,6 %
Recommendations from others 3 2,5 1,0 39,8 %
Industry information 2 2,3 0,9 40,1 %
Trade associations 5 3,0 1,1 36,5 %
Other sources 4 2,8 1,2 43,8 % Table 3: Information sources and the rank order.
Additionally, one open question according to the information sources was
added where the respondents were asked to express more about the important
information sources and the use of them. There were few answers and they
were answered very briefly. Few respondents emphasized the importance of
financial statements and annual reports as the sources they utilized the most,
and they provide the most relevant information for the creditors’ needs.
Companies’ recent economic behavior is examined using the information in
annual reports, and in addition, the future behavior and possible results are
regarded. In order to look into the future, companies’ cash flows are evaluated.
Few respondents stated the importance of UC6 in the commercial lending
progress. As the commercial and financial risks are evaluated, creditors need
accounting information to complete these calculations. Additionally, the
company’s business model is assessed for the purpose of lending choices.
Thus, the emphasis is on the information that provides facts about the
company’s past economic behavior and information about how the company
would behave economically in the future.
6 UC group: Offer reports as well as credit monitoring and qualified financial analysis. UC’s
database includes the information an all companies registered in Sweden (UC 2014).
31
5.3. Importance of financial accounting information
Next, the importance of different financial accounting information was
investigated. The respondents were asked to select the financial statement
items according to how important they see these in the commercial lending
progress. The aim of this question was to find out the most important
accounting information that is used by creditors. The table below counts the
amounts as a percent of the total amount of respondents who chose the
particular option. When looking only at the percentages, information about
the company’s profit/ loss was selected to be very important as 94, 1 percent
of the total amount of respondents stated so. According to the percentages,
the information about the share price seems to be least important as 23, 5
percent chose the information to be ‘rather not useful’. In addition only 11, 8
percent selected the information about the share price to be very important,
which is way less when comparing the other information in the table.
Financial accounting information % of the total amount of respondents
Very
important
Rather
important
Neither/
nor
important
Rather not
important
Not at all
important
Details of liabilities 81,3 % 18,8 % 0,0 % 0,0 % 0,0 %
Details of assets 76,5 % 23,5 % 0,0 % 0,0 % 0,0 %
Details of equity 76,5 % 23,5 % 0,0 % 0,0 % 0,0 %
Revenue 88,2 % 11,8 % 0,0 % 0,0 % 0,0 %
Profit/ loss 94,1 % 5,9 % 0,0 % 0,0 % 0,0 %
Share price 11,8 % 23,5 % 41,2 % 23,5 % 0,0 %
Dividend information 52,9 % 17,6 % 29,4 % 0,0 % 0,0 %
Operating result 82,4 % 17,6 % 0,0 % 0,0 % 0,0 %
Operating cash flow 87,5 % 12,5 % 0,0 % 0,0 % 0,0 %
Financing cash flow 70,6 % 29,4 % 0,0 % 0,0 % 0,0 %
Investing cash flow 64,7 % 29,4 % 5,9 % 0,0 % 0,0 %
Financial ratios 70,6 % 23,5 % 5,9 % 0,0 % 0,0 %
Cash and cash equivalens 58,8 % 35,3 % 0,0 % 5,9 % 0,0 %
Trade and other receivables 35,3 % 41,2 % 23,5 % 0,0 % 0,0 %
Trade and other payables 35,3 % 41,2 % 23,5 % 0,0 % 0,0 % Table 4: Financial accounting information and the percentages of the total amount of respondents.
The rank order of the importance of the financial accounting information can
be obtained from the table below. The rank order is based on the mean values
of each item. The results implied that the most important financial accounting
information was respectively profit/ loss, revenue, operating cash flow,
operating result, details of liabilities, details of assets, details of equity,
financing cash flow, financial ratios, investing cash flow, cash and cash
32
equivalents, dividend information, trade and other receivables, trade and other
payables, and share price. All the financial accounting information except
share price has mean value higher than 2, 0 which indicate the importance of
all the items other than the share price. Share price with the mean of 2, 76
represent the lowest importance for creditors and has significantly different
mean value than others.
Financial accounting information
Rank Mean
Standard
deviation
Coefficient
of variation
Details of liabilities 5 1,19 0,4 33,9 %
Details of assets 6 1,24 0,4 35,4 %
Details of equity 6 1,24 0,4 35,4 %
Revenue 2 1,12 0,3 29,7 %
Profit/ loss 1 1,06 0,2 22,9 %
Share price 13 2,76 1,0 35,1 %
Dividend information 11 1,76 0,9 51,2 %
Operating result 4 1,18 0,4 33,4 %
Operating cash flow 3 1,13 0,3 30,4 %
Financing cash flow 7 1,29 0,5 36,3 %
Investing cash flow 9 1,41 0,6 43,8 %
Financial ratios 8 1,35 0,6 44,8 %
Cash and cash equivalens 10 1,53 0,8 52,3 %
Trade and other receivables 12 1,88 0,8 41,5 %
Trade and other payables 12 1,88 0,8 41,5 % Table 5: Financial accounting information and the rank order.
5.4. Useful approaches
The following question investigates the usefulness of different approaches
when evaluating potential customer. Respondents were asked to choose the
most fitting option whether the particular approach is very useful, rather
useful, neither/nor useful, rather not useful or not at all useful. These
approaches are based on accounting information and thus represent an
important part in this field. The aim of this question was to investigate the
usefulness of certain approaches in lending situations. When looking only at
percentages in the section ‘very useful’, financial ratios and trend analysis
looking five past years received the highest percentages. When only looking at
the percentages, the results implied that the least important approach is trend
analysis looking ten past years as 12, 5 percent that answered that the
approach is ‘not at all useful’ and only 6, 3 percent chose the option ‘very
33
useful’. Any approach other than the trend analysis, which looked back ten
years in the past, didn’t gained option ‘not at all useful’ and thus, can be
interpreted to represent to be least useful approach for creditors. Respondents
were able to comment on each question, and one creditor commented on this
question saying that they do not tend to look back even five years. If there had
been the option of looking back two to three years, the option would have
been really useful. According to these answers, it can be interpreted that
looking into the past, customers’ financial performance is focused on looking
the recent past and it is not necessary to complete a trend analysis of ten years.
Approaches % of the total amount of respondents
Very
useful
Rather
useful
Neither/
nor useful
Rather
not useful
Not at all
useful
Trend analysis looking five past years 50,0 % 37,5 % 6,3 % 6,3 % 0,0 %
Trend analysis looking ten past years 6,3 % 50,0 % 25,0 % 6,3 % 12,5 %
Five Cs approach 37,5 % 37,5 % 18,8 % 6,3 % 0,0 %
Financial stress test 18,8 % 56,3 % 25,0 % 0,0 % 0,0 %
Financial ratios incl. two consecutive years 50,0 % 50,0 % 0,0 % 0,0 % 0,0 % Table 6: Useful approaches and the percentages of the total amount of respondents.
The following chart presents the rank orders of these approaches in order to
see which one is the most useful approach. The rank order is based on mean
values. According to the research results, the most useful approach is financial
ratios including two consecutive years. The following approaches after
financial ratios in order of the most useful ones are respectively trend analysis,
looking at the five years, five Cs approach, financial stress test, while the last
useful option is trend analysis that looks at the past ten years.
Approaches
Rank Mean
Standard
deviation
Coefficient
of variation
Trend analysis looking five past years 2 1,7 0,9 51,7 %
Trend analysis looking ten past years 5 2,7 1,1 42,4 %
Five Cs approach 3 1,9 0,9 47,9 %
Financial stress test 4 2,1 0,7 33,0 %
Financial ratios incl. two consecutive years 1 1,5 0,5 34,4 % Table 7: Useful approaches and the rank order.
5.5. Annual report
The next section investigates the most influencing annual report parts in
commercial lending. The aim of this question was to examine the differences
34
in influence and investigate the order of financial statements. The respondents
were asked to choose the correct option whether the particular annual report
section was influencing their credit lending ‘very much’, ‘not at all’ or
something in the between these two. From the table below, the percentages
show that the most influencing parts are balance sheet and cash flow
statement as 94, 1 percent chose these parts to ‘influence very much’. The
lowest percent was for ‘influence very much’, which gained accounting policies
as 11, 8 percent of the total amount of respondent chose this part to ‘influence
very much’. All the annual report parts are influenced, and at least
‘neither/nor’ or more, as none of the respondents chose the options ‘influence
not much’ and ‘influence not at all’.
Parts of annual report % of the total amount of respondents
Influence
very much
Influence
somewhat
Influence
neither/
nor
Influence
not much
Influence
not at all
Corpotate information 35,3 % 52,9 % 11,8 % 0,0 % 0,0 %
Director's report 23,5 % 52,9 % 23,5 % 0,0 % 0,0 %
Auditor's report 76,5 % 23,5 % 0,0 % 0,0 % 0,0 %
Accounting policies 11,8 % 76,5 % 11,8 % 0,0 % 0,0 %
Balance sheet 94,1 % 5,9 % 0,0 % 0,0 % 0,0 %
Income statement 88,2 % 11,8 % 0,0 % 0,0 % 0,0 %
Cash flow statement 94,1 % 5,9 % 0,0 % 0,0 % 0,0 %
Notes to the financial statement 70,6 % 29,4 % 0,0 % 0,0 % 0,0 % Table 8: Parts of annual reports and the percentages of the total amount of respondents.
According to the mean values, the parts of annual report were ranked in order
to find out the most influential part. According to the research results, balance
sheet and cash flow statement are the two most influential parts of annual
report in commercial lending. The next most influential part was income
statement. Thus, the financial statements are distinctly the most influential
when comparing them to the other parts of annual report. The following parts
after the financial statements, when looking the most influencing parts, were
respectively auditor’s report, notes to the financial statement, corporate
information, director’s report and accounting policies. All the parts had the
mean value 2, 0 or better which indicates the strong agreement on the
usefulness of the annual report.
35
Parts of annual report
Rank Mean
Standard
deviation
Coefficient
of variation
Corpotate information 5 1,76 0,7 37,6 %
Director's report 6 2,00 0,7 35,4 %
Auditor's report 3 1,24 0,4 35,4 %
Accounting policies 6 2,00 0,5 25,0 %
Balance sheet 1 1,06 0,2 22,9 %
Income statement 2 1,12 0,3 29,7 %
Cash flow statement 1 1,06 0,2 22,9 %
Notes to the financial statement 4 1,29 0,5 36,3 % Table 9: Parts of annual report and the rank order.
5.6. Easiness to use and general importance of financial statements
The last rating question posed to respondents included questions such as how
easy it is to use financial statements and how important the financial
statements are in commercial lending. The aim of this question was to
investigate the general idea that creditors have in regards to the financial
statements. In the questionnaire, respondents were asked to rate whether the
level of easiness to use the statements is ‘very low’, ‘low’, ‘acceptable’, ‘high’ or
‘very high’ and whether the importance of financial statements is ‘very low’,
‘low’, ‘acceptable’, ‘high’ or ‘very high’. The percentages in the following table
present how creditors evaluated the given facts. For example most of the
creditors assessed the easiness of using financial statements to be ‘acceptable’
as 41, 2 percent chose the option. The importance of financial statements is
‘very high’ as 64, 7 percent chose the importance of the statements to be ‘very
high’. Additionally 29, 4 percent chose that the importance is ‘high’.
Concluding questions % of the total amount of respondents
Very low Low Acceptable High Very high
Easiness to use financial statements 0,0 % 0,0 % 41,2 % 29,4 % 29,4 %
Importance of financial statements 0,0 % 0,0 % 5,9 % 29,4 % 64,7 % Table 10: Concluding questions and the percentages of the total amount of respondents.
From the mean values can be interpreted that the ease of using the financial
statements is rather high as the mean value is 3, 9 which is close to the value 4,
0 that stands for option ’high’. The mean value of the importance of financial
statements is 4, 6 of which is in between the options ’high’ and ’very high’, and
more specifically closer to the option ’very high’.
36
Concluding questions
Mean
Standard
deviation
Coefficient
of variation
Easiness to use financial statements 3,9 0,9 22,1 %
Importance of financial statements 4,6 0,6 13,5 % Table 11: Concluding questions and mean values.
5.7. Improvements in accounting information
The last part of the questionnaire asked whether the creditors have some idea
of how the accounting information could be improved. Few respondents
stated their opinions about their ideas regarding how financial statements
could serve creditors’ work better. First, there was a need to have more
detailed information when extra-ordinary posts have occurred, even if it was
not booked as an extra-ordinary item. Additionally, another respondent
indicated the need for a better explanation in terms of extra-ordinary items.
The need was to have more clarifying notes to explain the figures when
something extra-ordinary has happened.
Another suggestion was that leasing should be treated as a debt in the balance
sheet. There was no further explanation concerning the suggestion. After the
open question about the improvements in accounting information there was
another open space where respondents were able to leave comments. There
were no final comments so it can be assumed that most of the important parts
concerning the accounting information were included in the questionnaire and
that the survey content was clear for the respondents.
37
6. Analysis
This part of the thesis will look at the research results and compare them to
recent research and literature in this field. The aim of this chapter is to provide
analysis which answers the research questions.
6.1. Importance of financial statements and information sources
Research results indicated the most frequently used information sources by
creditors in the commercial lending progress. There was a remarkable
difference between the use of financial statements and other information
sources as financial statements were significantly more frequently used than
other business information sources. Financial statements were used all the
time according to 84, 4 percent of the total amount of respondents. Thus, the
results support the previous research results (Yap 1997) as the financial
statements have been seen as a major source of information.
Results of this paper imply the importance of financial statements as a primary
source of information in the decision-making process by Swedish banks. The
reasons, why banks utilize financial statements the most, and use it as a
primary source of information derive from several things. Firstly, creditors’
primary concern is whether the company is able to repay the debt with interest
(Billings & Morton 2002; Wolk et al. 2013). For paying the debt, companies
need cash. The information whether a company is generating cash, can be
obtained from financial statements (IASB 2013) and thus, the importance of
this information source is remarkable. If creditors need additional information,
they exploit other information sources. However, why there were still
creditors, who stated to use the financial statements only often, seldom or
even less frequently? The question is where do they obtain the information
about the financial standing of a company then? It can be assumed, that either
the company is previous client and thus further liquidity assessment is not
every time necessary or the credit is so small that analyzing financial standing
is not essential. Or secondly, the other sources are used in order to obtain
enough information. As some respondents answered to utilize UC7, which
offer financial analysis.
7 UC group: Offer reports as well as credit monitoring and qualified financial analysis. UC’s
database includes the information an all companies registered in Sweden (UC 2014).
38
To obtain accounting information is easier today, as companies are signaling
their financial figures online in their webpage. This might add the usage of
accounting information as the access is easier and less time-consuming, than
for example searching for media reports. Through signaling accounting
information, companies are reducing information asymmetry. Likewise the
users of accounting information, in this research the creditors are utilizing this
information aiming to reduce information asymmetry as well (Dell’ariccia &
Marquez 2006). This argument is valid as this paper indicates the usage of
different information sources, when examining the financial standing of a
company. According to Dell’ariccia and Marquez (2006), banks can cooperate,
and through sharing of information with other banks reduce the information
asymmetry. This argument can be validated as this paper indicates that
creditors in Sweden use recommendations from others (i.e. colleagues) as a
source of information. This information source was ranked as a third most
used source (table 3: Information sources and the rank order).
The least used information source was media reports, which even 5, 9 percent
of the total amount of respondents claimed to use never. This might be due to
the fact that the signals through other information sources are sufficient for
decision-making and thus media reports are seen as unnecessary information
source. To access the information through this source might be in addition
more costly as well as more time-consuming. Hence, the actual value of the
information is lower than the actual cost of the information. Alattar and Al-
Khater (2007) analyzed the usage of information sources as well. The results
were interesting, as the second most used information source was media
releases, completely contrary to this research results. However, the results are
not fully comparable as Alattar and Al-Khater (2007) do not compare
information sources to financial statements (i.e. how much more used are
financial statements compared to the usage of other sources). In addition the
studies were not identical as the researches included divergent information
sources. Hence, the results indicate that media reports do not play a huge role
in Sweden, when comparing the importance in other business environments,
like the research in Qatar by Alattar and Al-Khater (2007).
Another similar research accomplished by Yap (1997) compared how
frequently different information sources are used. According to the results,
first most frequently used are financial statements. After financial statements
are media reports and the least frequently used are recommendations from
others. However, there is a difference to the results of this paper as the
39
recommendations from others represent more frequent use than media
reports. It implies that in Sweden, it is important to cooperate and share
information with others.
As an outline, it can be concluded that accounting information seems to be
likely the primary source of information in commercial lending. This is due to
the fact that the most important information can be obtained from financial
statements, such as the information about company’s ability to generate cash.
The most important information is the most essential for creditors when they
decide to begin lending. It does not mean that the other sources do not
provide essential information, it is just less crucial than the accounting
information and this makes the information source ancillary.
6.2. Annual report and the importance of cash flow
Signaling theory explains why the focus is on annual reports as companies
signal their financial performance through diverse releases. According to
Dainelli et al. (2013) annual report is the most reliable way to communicate
between parties. In this paper, the usage of annual report compared to other
information sources support the argument by the Dainelli et al. (2013), as the
report is widely used among banks in Sweden. This research results indicate,
that all of the annual reports are influencing to creditors’ decision to pursue
lending as the mean values of each part indicates that the parts influence either
very much or somewhat. This is contrary to the findings by Yap (1997), where
some parts did not have such a strong influence to lending process. These
parts were auditors’ and directors’ reports, which probably imply that users in
Sweden are more concerned about the importance of audited reports.
As recent research has focused on cash flow information (Catanach 2000;
Dechow 1994; Ingram & Lee 1997; Jones et al. 1995; Minnis 2011; Yap 1997),
this paper looks at the importance of cash flow statement compared to other
annual report parts. Results denoted that the CFS is the most frequently used
part of the annual report, together with balance sheet. When comparing the
results to previous research (Alattar & Al-Khater 2007; Yap 1997) about how
important cash flow statement is compared to other parts of the annual report,
the outcomes are similar. That, what makes the cash flows statement so
important, is most likely the relative important information that the statement
includes. As it is all about company’s ability to generate cash, i.e. to make a
profit, from where creditors can obtain its own part.
40
As Minnis (2011) investigated, audited statements have an important role in
debt pricing. Thus, creditors underline more audited financial statements. The
importance of audited reports appeared in this paper as well as the auditor’s
reports are influencing the most after the financial statements with regard to
annual reports. In addition the usage of financial statements in Sweden has a
more meaningful role when compared to research accomplished by Alattar
and Al-Khater (2007) in Qatar. The results of this research in Sweden implied
that the most frequently used financial statements are balance sheet and cash
flow statement, and the following most frequently used is income statement.
After the financial statements, there followed other parts of annual report
which order differ from the investigation by Alattar and Al-Khater (2007), as
they examined that auditor’s report was more frequently used than cash flow
statement and income statement. The difference might be that Alattar and Al-
Khater (2007) included creditors, investors and financial analysts, and the
usage of financial statements differs among these user groups. However, the
importance and usefulness of balance sheet is observable as the balance sheet
is in first place in the ranking by Alattar and Al-Khater (2007), Yap (1997), as
well as in this paper. Nevertheless, the results support the previous statement
that all the three statements can be regarded to be complementary (Alattar &
Al-Khater 2007; Yap 1997).
Additionally, in all the papers the importance of financial statements emerges
as balance sheet, income statement and cash flow statement representing the
most influencing and frequently used parts in the ranking. There was only a
small exception in the results by Alattar and Al-Khater (2007), where the
auditors’ report was ranked to be more important than cash flow statement.
The results indicated the high reliability towards audited reports in Qatar. As
the auditor’s report followed in the ranking just after financial statements in
this paper as well, likewise there is a high reliability toward audited reports in
Sweden.
As a summary can be stated, that information about company’s ability to
generate cash is fundamental in creditors lending decisions as the main
concern is the company’s ability to repay the debt with interest (Billings &
Morton 2002; Wolk et al. 2013). In order fulfill the basic requirement for
creditors; companies need generate cash and profit. As the cash flow
information simply indicate the company’s ability to generate cash, it is crucial
for creditors. Hence, it represents the most influencing financial statement
41
together with balance sheet. Income statement is only slightly less used than
other main financial statements.
6.3. Importance of financial accounting information
One part of the questionnaire sought to determine the importance of financial
accounting information in creditors’ decision making. Hail (2013) noticed the
primary concern was the content of financial statements. As producing
financial accounting information is costly (Breyer et al. 2010), it is important to
consider about which information is important and relevant to its users. The
aim was to find out the most relevant information and thus where the
standard setters, such as FASB and IASB should focus on. Comparing the
outcome with research results by Yap (1997) can be interpreted whether the
users’ decision model has changed over the time. The results support one
another as the importance of earnings has not sifted behind the information
about cash. This is consistent with Yap (1997), as information about profit is
ranked first, as it is in the research results of this paper. Additionally, both
results represent similar order as the information about share price is one of
the last ones in the ranking and details of assets and liabilities are ranked in the
middle. In addition the information about financial ratios is after the
information of details of assets and liabilities, when looking the ranking
concerning how important the item is to users. This research provides
evidence that accounting information have impact on lending decisions;
however, the importance of different figures differs. The importance differ
regarding to the aim of the users, as creditors look whether the company is
able to repay the debt, the information about cash and profit/ loss is the most
essential. For investors the importance order would probably differ as
information concerning the dividend and share price might play more
important role.
Recent research has focused on the importance of cash flow information
(Catanach 2000; Dechow 1994; Ingram & Lee 1997; Jones et al. 1995; Minnis
2011; Yap 1997) and according to creditors the emphasis has been on
operating cash flow. According to previous research the cash flow has been
seen as one of the most useful corporate performance measures. This paper
evaluated the importance of cash flow information compared to other
important financial accounting information. Results of this research indicated
that operating cash flow is the third most important form of financial
accounting information. Ranked before the operating cash flow were
42
information about profit/ loss and revenue. Hence, it denotes the importance
of operating cash flow information. Additionally, other parts of cash flow
information were included such as financing cash flow and investing cash
flow. The rank order (table 5: Financial accounting information and the rank
order) indicates that operating cash flow is significantly more important than
other cash flow information as the ranking for financing cash flow was
seventh and investing cash flow was ninth when comparing the operating cash
flow, which was third most important. Thus, creditors understand operating
cash flow such as Allen and Cote (2005) stated.
The EMH states that market reacts for accounting information, when the
financial information is utilized. Another feature is the marginal value cost of
information (figure 3: Marginal value cost of information), where the users
stop acquiring information which does not bring value. According to the
results, creditors in Sweden see information about share price rather not
important and thus do not obtain more information about it. This implies that
companies should rather focus on the presentation and signaling of useful
information such as information about profit/ loss, revenue and operating
cash flow.
As creditors base their financial decisions on accounting information, it has to
bring value to their decisions. As the main aim of business is to make profit,
the information about profit/ loss indicate the extent, to which a company has
been successful in achieving profit. Hence, the details of revenue, and profit/
loss are essential for creditors. When looking the results of this paper
concerning the importance order of financial accounting information, after the
information about company’s ability to generate cash and revenue follows
details of assets. As creditors look additional loan security, the information
about company’s asset is important. If company would have difficulties to
repay the debt, it could be considered to obtain it from the assets value.
Hence, the information is additionally crucial for creditors. However, the
information of assets are obtained generally for further security for the loan,
the importance is not that high than the information how much revenue and
cash company can generate as the main presumption is that company is
generating cash from business and thus, able to repay the loan. These
viewpoints indicate the divergent relative importance of different accounting
information.
This research results implied an exceptional point as the creditors chose
balance sheet to be more frequently used than income statement but chose the
43
income statement information, such as revenue and information about profit/
loss, to be more important than information in the balance sheet, such as
details of assets and liabilities. The inconsistency of the results might due to
the fact that for creditors it might be difficult to distinguish what information
is important and what information they use the most. Since all information is
used, it is challenging to choose the most important one. It might depend on
the company and the circumstances of credit lending in order to determine
which information is the most useful for particular occasion. However, it
indicates the need of future research in this field.
6.4. Useful approaches
Literature review pointed out a few approaches that creditors are using when
analyzing financial standing of a potential customer. These approaches
commonly are based on accounting information and thus are important. Inter
alia Beaulieu (1994) and Kwok (2002) stated that an approach called the five
Cs is useful for analyzing the financial stage of a company. The approach has
been considered to be useful among creditors in Sweden as well, as most
respondents chose ‘very useful’ or ‘rather useful’ options when thinking about
the usefulness of the approach. As previous literature has stated (Alexander et
al. 2009; Delen et al. 2013; Kwok 2012; Talebnia et al. 2012), the importance
of accounting ratios came up in this paper as the financial ratios were ranked
first by the means of most useful approach. Accounting figures alone are not
always valuable without a comparison. Financial ratios are important for
creditors likely as they provide additional information through calculations
(Talebnia et al. 2012).
Trend analysis when looking ten years past was the least useful approach.
Commonly the time frame of ten years is too long and in commercial lending
process in Sweden, the approach is least used. This might be due to the fact
that conducting such an approach could be too time-consuming and the
benefit does not cover the cost. A more commonly used approach involved
trend analysis looking five past years but however, in some cases even five
years analysis has claimed to be too backward-looking. One creditor
commented that analysis including two or three past years is used more, than
including five past years. This is an argument for presenting financial
accounting information in a way that focuses more on the few past years
instead of only one or five or even more past years. It can be justified that
presenting two to four past years would be the most essential for creditors.
44
Hence, accounting information could be possibly improved regarding to the
presentation of figures two to four past years. This is likely due to the fact that
creditors look the security that their loans will be repaid with interest and for
confirming this; they look company’s activities for longer period of time. The
other main user group, investors, might look only one or two past years, as
they might be interested to gain profit share fast and thus are not interested in
company’s past activities in longer period than that. Investors might need
security only for a short period, as they are waiting for return for a shorter
period.
6.5. Concluding opinion about the common importance and ease of using financial statements
As a concluding question the creditors were asked to rate the importance of
financial statements in general. Inter alia Francis and Schipper (1999)
hypothesized that financial statements have lost their relevance to their users,
while Hail (2013) stated that importance of accounting information is not
uncontested when it comes to valuation purposes. These arguments increase
the importance to evaluate the financial information from user point of view.
According to the respondents the overall importance of financial statements
was very high. Not one of the respondents answered that the importance
would be low, indicating that the overall importance is nevertheless significant.
This is consistent with the first part of this paper which analyzed the financial
statements as a primary source of information.
Another concluding question regarding the ease of using financial statements,
which likewise didn’t gain any negative answers, determined that the easiness
to use the statements would be rather high. However the mean value of the
answer was not as high as the mean value in the question about the
importance of financial statements. It indicates that some improvements
should be done concerning the easiness of using financial statements and
would in turn, facilitate creditors’ work and serve their demands.
6.6. Additional information need
The last part of the questionnaire sought to find suggestions that could
improve financial reporting and thus serve creditors work better. One main
matter that creditors pointed out was regarding extra-ordinary items and their
presentation. The creditors’ desires concerned the released information of
extra-ordinary items as it was claimed to be defective. Additional disclosing
45
would be essential even if the item would not be regarded as an extraordinary
item. According to the stakeholder theory originated by Freeman (1984), the
main responsibility of a company is to serve its stakeholders. In order to serve
the creditors aligned with stakeholder theory, companies should release more
information about the extra-ordinary items. In addition Abdel-khalik (1972)
has argued that as the markets react for accounting information, the system is
in a good base and hence only the output could be improved. This is aligned
with stakeholder theory, which imply why the accounting signals should be
improved in a favor of creditors. According to this research results, companies
should focus on its stakeholders and release more information about the extra-
ordinary items.
46
7. Conclusion
The aim of this chapter is to conclude this paper. The conclusion includes the
main findings based on the theory chapters and analysis part. The final
reflections as well as future research suggestion are presented.
7.1. Reflections
Creditors are important for the economy as a means of providing credit for a
business. They are responsible for screening out applicants whose financial
standing is weak. If creditors fail in their work, the consequences might be
huge as it might turn in lower profitability of banks and increased vulnerability
which in turn can lead to macroeconomic risks (Dell’ariccia & Marquez 2006).
In order for creditors’ to be able to work more effectively, they need relevant
information. Accounting information has an important role in banking
activities as they are aiming for successful strategies. Studies about financial
reporting have been usual research topics since the 1960s (Yap 1997), but the
field is researched more in favor of investors (Allen & Cote 2005).
Hence, the purpose of this research is to understand the importance of
accounting information compared to other sources of information in lending
process. As stated in previous research (Allen & Cote 2005) it is hard to
identify any changes in accounting information if creditor’s decision making
behavior is not well investigated. Thus, this research is investigating the role of
accounting information in banks’ decision-making process in order to initiate
the discussion of whether there are changes and improvements to be made
concerning financial reporting. An additional motivation behind the topic is
the importance towards creditors in Sweden as main provider of capital (Bird
& McEwan 2012).
First of all, the results of this thesis highlighted the importance of financial
statements when comparing these to another information sources. The use of
financial statements was significantly more frequent than the use of other
information sources such as media reports, recommendations from others,
industry information, trade associations and other sources. The result is
consistent with previous research as Alattar and Al-Khater (2007), and Yap
(2007) indicated the importance of financial statements as well. Additionally in
Sweden, creditors are sharing information with others, which imply the respect
47
towards co-operation. Sharing information is used to reduce information
asymmetry (Dell’ariccia & Marquez 2006).
Additionally, this research analyzed the most influencing parts of annual
report. The most influencing part was clearly financial statements. The results
revealed that in creditors’ lending decisions the information about company’s
ability to generate cash is crucial, as the main concern is the company’s ability
to repay the debt with interest (Billings & Morton 2002; Wolk et al. 2013). All
the other parts were influencing too, however less, which nevertheless indicate
the relative importance of all the parts in annual report. Cash flow statement
was the most influencing statement together with balance sheet followed with
income statement, which indicates the interest toward companies’ ability to
generate cash. How much the company generates cash can be obtained from
financial statements (IASB 2013), and thus it makes financial statements more
crucial than other parts of annual report. As the financial statements represent
the most frequently used and can be regarded to be complementary; hence this
study is also consistent with previous research by Alattar and Al-Khater
(2007), and Yap (1997).
As creditors’ main concern is whether a company is able to repay the debt, the
information about profit/ loss and revenue were expectedly the most
important information for creditors. The details of assets were quite important
as well and likely due to the fact, that it will secure the repayment of a loan, if
the company does not generate enough cash. In addition, creditors are looking
companies’ past years in order to analyze the financial standing as they want
certain security for their loan. However, the results of this paper indicate that
analysis including ten past years is pretty useless and five years quite long time
frame as well. Thus, creditors are focusing more two to four past years. The
main used approach was financial ratios, which is consistent with recent
literature (Alexander et al. 2009; Delen et al. 2013; Kwok 2012; Talebnia et al.
2012).
However, there was an inconsistency in the results as the creditors chose
balance sheet to be more frequently used than income statement but chose the
income statement information, such as revenue and information about profit/
loss, to be more important than information in the balance sheet, such as
details of assets and liabilities. Hence, it indicates the need for further research
in this field.
48
7.2. Future Research
The results of this paper indicate the need for future research in order to
examine the similarities and differences in usage of accounting information
and information needs between users and countries. The results of this
research and future research are accomplished in order to initiate discussion
about the relevance of accounting information and which information really is
important. These discussions might result in ideas for important changes, and
thus might improve the current financial reporting system.
During the progression of this research, few ideas for future research in this
field appeared. A first suggestion would be to include all the different
monetary financial institutions in the empirical part as having respondents
form different sectors might add value to the results. The research could use
the questionnaire developed for this paper and thus the results would be
completely comparable. This research would bring more knowledge about the
accounting information usage among all the financial institutions, not only
banks as it is in this paper. This would help companies to target their
information presentation according to the need of certain institution, which
they are using as a primary source of credit.
A second suggestion would be to conduct an experiment, where the results of
this paper are tested in a real business case. Hence, it could be analyzed
whether the experiment occasion effects differently to the usage of accounting
information compared to the situation, where online questions are answered.
It could be analyzed whether creditors act in a lending process as they state in
this paper.
49
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