Short summary Accounting and Governance
Lecture 1, Introduction
- Accounting = the system of summarizing business and financial transactions and analyzing
and reporting the results
- Governance = the system by which entities are directed and controlled
Lecture 2, Decision usefulness of financial accounting information
- Decision useful =
o The ability of financial accounting information to help users make good decisions
o If information contributes to a better predicting future economic state
- Why do we need a decision useful concept?
o Sets boundary for reporting companies to guide what to include in financial report
o Knowing investor’s decision needs enables a firm to prepare useful financial
statements -> using rational decision-making theory
Rational decision-making theory captures the decision process of the
average investor (decisions are (on avg) rational & decision maximize utility)
Makes clear how financial info helps investor to make decisions
Helps accountant to provide useful info for investment decision
- Efficient securities market = market where the prices of securities traded on that market
always fully reflect all information that is publicly known about those securities.
- Capital asset pricing model = E(Rjt) = Rf + βj (E(Rmt) – Rf)
o Critique -> assumes rational expectations – common knowledge – no transact costs
- IASB conceptual framework = describes the objectives of financial reporting -> a tool that
helps the board develop requirements in IFRS standards based on clear principles
o Principles should require entities to present relevant/comparable/transparent info
o Firms need to report according to IFRS -> to compete and be comparable
Link between decision usefulness & rational decision-making theory -> we need assumptions on how
investors make decisions.
- Fundamental qualitative characteristics: info is useful if it is relevant and reliable
o Relevant = if the information makes a difference in decision making
o Faithfully representable = reliability = information is true / without material errors
- Enhancing qualitative characteristics: enhance the usefulness of useful info
o Comparability – verifiability – timeliness – understandability
Papers Gassen & SChwedler – Williams & Ravenscroft
Accounting research has not come up with a measure of decision usefulness -> “Decision usefulness is an admittedly
nonspecific term as virtually anything could be useful to someone’s decision’’. Rests on rational economic actors -> limited
rationality. Accounting data is not predictive, use accountability / stewardship.
- Fair value mark-to-market accounting: most decision useful for liquid assets -> a method of measuring the fair
value of accounts that can fluctuate over time, such as assets and liabilities
- Historical cost accounting: most decision useful for non-liquid assets -> a method in which the value of an asset on
the balance sheet is recorded at its original cost when acquired by the company.
, Lecture 3, Voluntary disclosure & decision usefulness of non-financial
information
- Sustainability reporting = provides non-financial information, focus on environmental and
social related aspects -> ESG factors -> financially material to investment performance
o Mandatory reporting = reporting is obligatory for all entities under consideration
o Voluntary reporting = firms are free to choose what and how to report
Why do companies engage in non-financial reporting?
- Signaling theory = firms with superior non-financial performance voluntarily disclose info to
make a difference from the poor performance firms
o To reveal the nature of their true performance & to potentially increase market value
- Legitimacy theory = firms with poor non-financial performance voluntarily disclose info as a
legitimation tactic to influence public perception.
o To re install or improve the legitimacy of their firm
What sustainability information do firms need to report?
- IFRS = set of accounting standards that govern how transactions and events should be
reported in the financial statements
- CSRD = introduces more detailed reporting requirements on sustainability
o
- Materiality = information is material if omitting or misstating it could be expected to
influence decisions that users of financial reports make
o Material information is expected to influence decisions -> decision useful info
Impact materiality = material topics are those that reflect the organizations
most significant impacts on economy, environment and people.
Stakeholder oriented (GRI)
Single materiality = how sustainable factors affect the financial value of firm
Investor oriented (SASB)
Double materiality = how sustainable factors affect the financial value of a
firm and how the firm affects the environment and society.
Stakeholder oriented (CSRD)
Papers Dhaliwal - Amel-Zadeh
Can the initiation of voluntary disclosure reduce a firm´s cost of equity capital?
- High cost of equity capital = more likely to report sustainability information -> attractive for investors -> cost of
equity capital will decrease because high reliability and thus lower risk
- Superior CSR performance -> cost of equity capital decreases because of high info reliability and thus a lower risk
- Superior CSR performance attracts investors = raise a large amount of capital
Why and how do investors use ESG information?
- ESG = environmental, social, and governance information -> considered as material info for investment decisions
- Use of ESG information is driven primarily by financial rather than ethical motives
- Barriers to use ESG data in the investment decision process: lack of cross-company comparability
and lack of standards governing the reporting ESG data.
- Some investment styles: active ownership, full integration, positive screening
o Overall, investors consider all strategies, except negative screening methods, to have a positive impact
on returns
Active ownership = when shareholders engage in a firm, they have invested in to influence the
company's strategy and actions.
positive screening = process of finding firms that score good on ESG factors relative to peers
Lecture 1, Introduction
- Accounting = the system of summarizing business and financial transactions and analyzing
and reporting the results
- Governance = the system by which entities are directed and controlled
Lecture 2, Decision usefulness of financial accounting information
- Decision useful =
o The ability of financial accounting information to help users make good decisions
o If information contributes to a better predicting future economic state
- Why do we need a decision useful concept?
o Sets boundary for reporting companies to guide what to include in financial report
o Knowing investor’s decision needs enables a firm to prepare useful financial
statements -> using rational decision-making theory
Rational decision-making theory captures the decision process of the
average investor (decisions are (on avg) rational & decision maximize utility)
Makes clear how financial info helps investor to make decisions
Helps accountant to provide useful info for investment decision
- Efficient securities market = market where the prices of securities traded on that market
always fully reflect all information that is publicly known about those securities.
- Capital asset pricing model = E(Rjt) = Rf + βj (E(Rmt) – Rf)
o Critique -> assumes rational expectations – common knowledge – no transact costs
- IASB conceptual framework = describes the objectives of financial reporting -> a tool that
helps the board develop requirements in IFRS standards based on clear principles
o Principles should require entities to present relevant/comparable/transparent info
o Firms need to report according to IFRS -> to compete and be comparable
Link between decision usefulness & rational decision-making theory -> we need assumptions on how
investors make decisions.
- Fundamental qualitative characteristics: info is useful if it is relevant and reliable
o Relevant = if the information makes a difference in decision making
o Faithfully representable = reliability = information is true / without material errors
- Enhancing qualitative characteristics: enhance the usefulness of useful info
o Comparability – verifiability – timeliness – understandability
Papers Gassen & SChwedler – Williams & Ravenscroft
Accounting research has not come up with a measure of decision usefulness -> “Decision usefulness is an admittedly
nonspecific term as virtually anything could be useful to someone’s decision’’. Rests on rational economic actors -> limited
rationality. Accounting data is not predictive, use accountability / stewardship.
- Fair value mark-to-market accounting: most decision useful for liquid assets -> a method of measuring the fair
value of accounts that can fluctuate over time, such as assets and liabilities
- Historical cost accounting: most decision useful for non-liquid assets -> a method in which the value of an asset on
the balance sheet is recorded at its original cost when acquired by the company.
, Lecture 3, Voluntary disclosure & decision usefulness of non-financial
information
- Sustainability reporting = provides non-financial information, focus on environmental and
social related aspects -> ESG factors -> financially material to investment performance
o Mandatory reporting = reporting is obligatory for all entities under consideration
o Voluntary reporting = firms are free to choose what and how to report
Why do companies engage in non-financial reporting?
- Signaling theory = firms with superior non-financial performance voluntarily disclose info to
make a difference from the poor performance firms
o To reveal the nature of their true performance & to potentially increase market value
- Legitimacy theory = firms with poor non-financial performance voluntarily disclose info as a
legitimation tactic to influence public perception.
o To re install or improve the legitimacy of their firm
What sustainability information do firms need to report?
- IFRS = set of accounting standards that govern how transactions and events should be
reported in the financial statements
- CSRD = introduces more detailed reporting requirements on sustainability
o
- Materiality = information is material if omitting or misstating it could be expected to
influence decisions that users of financial reports make
o Material information is expected to influence decisions -> decision useful info
Impact materiality = material topics are those that reflect the organizations
most significant impacts on economy, environment and people.
Stakeholder oriented (GRI)
Single materiality = how sustainable factors affect the financial value of firm
Investor oriented (SASB)
Double materiality = how sustainable factors affect the financial value of a
firm and how the firm affects the environment and society.
Stakeholder oriented (CSRD)
Papers Dhaliwal - Amel-Zadeh
Can the initiation of voluntary disclosure reduce a firm´s cost of equity capital?
- High cost of equity capital = more likely to report sustainability information -> attractive for investors -> cost of
equity capital will decrease because high reliability and thus lower risk
- Superior CSR performance -> cost of equity capital decreases because of high info reliability and thus a lower risk
- Superior CSR performance attracts investors = raise a large amount of capital
Why and how do investors use ESG information?
- ESG = environmental, social, and governance information -> considered as material info for investment decisions
- Use of ESG information is driven primarily by financial rather than ethical motives
- Barriers to use ESG data in the investment decision process: lack of cross-company comparability
and lack of standards governing the reporting ESG data.
- Some investment styles: active ownership, full integration, positive screening
o Overall, investors consider all strategies, except negative screening methods, to have a positive impact
on returns
Active ownership = when shareholders engage in a firm, they have invested in to influence the
company's strategy and actions.
positive screening = process of finding firms that score good on ESG factors relative to peers
