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FRS3 and analysts' use of earnings

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  • Richard Barker

Abstract

This paper examines analysts' use of earnings information and draws implications for the stock market role of the financial reporting regulator. Evidence from participant observation and from interview research suggests that: first, analysts treat the announcement of earnings with immediacy and importance and, further, they make use of the components of FRS3 in extracting a measure of ‘normalised' earnings; second, analysts do not, however, have a rational economic incentive to regard accounting information as their exclusive (or even their primary) focus of interest, and therefore financial statement analysis is not necessarily their core competence; third, analysts’ interpretation and use of earnings information is rather superficial, and there is limited understanding of underlying issues of recognition and measurement, and also of the interactions between earnings and the balance sheet. Overall, the analysis suggests an important role for the financial reporting regulator in compensating for analysts' inherent ‘disinterest’ in accounting. Financial reporting standards must be designed such that their actual content is consistent with the analysts' (uninformed) expectations of this content, otherwise the analysts' limited understanding will generate false assumptions and, thereby, unintended real effects on share prices.

Suggested Citation

  • Richard Barker, 2000. "FRS3 and analysts' use of earnings," Accounting and Business Research, Taylor & Francis Journals, vol. 30(2), pages 95-109.
    • Handle: RePEc:taf:acctbr:v:30:y:2000:i:2:p:95-109
    DOI: 10.1080/00014788.2000.9728928
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    2. Beattie, Vivien, 2005. "Moving the financial accounting research front forward: the UK contribution," The British Accounting Review, Elsevier, vol. 37(1), pages 85-114.
    3. Al-Aamri, Ibrahim & Hussain, Simon & Su, Chen & Hsu, Hwa-Hsien, 2022. "The importance of brokerage house size in determining the utility of IFRS8 segment data to financial analysts," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 47(C).
    4. Graaf, Johan & Johed, Gustav, 2020. "“Reverse brokering” and the consumption of accounting: A broker desk ethnography of an investment case," Accounting, Organizations and Society, Elsevier, vol. 85(C).
    5. Pascal Dumontier, 2004. "Essor des marchés boursiers et croissance de l’immatériel:de nouveaux défis pour la comptabilité," Revue Finance Contrôle Stratégie, revues.org, vol. 7(2), pages 11-32, June.
    6. Gaétan Breton & Richard Taffler, 2001. "Accounting information and analyst stock recommendation decisions: a content analysis approach," Accounting and Business Research, Taylor & Francis Journals, vol. 31(2), pages 91-101.
    7. Ahblom, Per & Sjögren, Ebba, 2019. "Delivering performance: the capital market framing of financial numbers from a preparer perspective," LSE Research Online Documents on Economics 102819, London School of Economics and Political Science, LSE Library.
    8. Imam, Shahed & Chan, Jacky & Shah, Syed Zulfiqar Ali, 2013. "Equity valuation models and target price accuracy in Europe: Evidence from equity reports," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 9-19.

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