The Relevance of Annual Reports – The Use of Annual Reports in Investment and Finance Decisions in a Developing Country Fatima Anwar, Saira Anwar1 and Abdul Mannan Department of Accounting and Finance, The University of Lahore (City Campus), Lahore, Pakistan 1 Department of Computer Science and Information Technology, Forman Christian College (A Chartered University), Lahore, Pakistan E-mail: Fatima. com; edu. pk; abdulmannan. com ABSTRACT Making an informed decision is always the toughest task for any investor, Financial Analyst or Creditor.
There are certain ways which are adapted by investors, Financial Analysts and Creditors in general to make a right choice and decision which later prove itself as worthy in terms of profit and loss. ? ? There is no one criteria which are being used by various stakeholders who perform the investment and finance decisions. From market trends to stock exchange information, every individual or groups rely on their own sources and their own way of dealing with situations and making decisions. ? ? In today’s arena annual reports provides information which can be used not only for future long term decisions but can also provide short term benefits.
These can also help in diagnosing the company current profile, its economic and financial performance, risks and the value it will yield to the people who will get involved with the company. Looking at the data provided in these reports the decision making process can be standardized, monitored and may also be controlled. ? ? This study is an attempt to avail the benefits provided by annual reports and the information it has for its users. The current paper analyses the use and effectiveness of Annual reports and the help which they yield to Financial Analysts, Creditors and Investors for their decisions and how much reliance they can have on Annual reports for Investment and Finance Decisions. This study is both empirical and descriptive in nature and not only perform the statistical testing of data collected from a developing country’s (Pakistan for current case) investors, creditors and financial analysts but will suggest factors that will lead investors and creditors of developing country to make an informed decision by the use of annual reports. ? ? The results after doing statistical analysis indicate that Annual reports is not only useful for all user categories but is also a much relied upon tool for investment and finance decisions
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Keywords: Finance Decisions, Investment Decisions, Annual Reports, Financial Statements Introduction Initially financial statements or annual reports were just the means for better accounting, data organizations and informative material and they were never considered as a part of economic decision making process. They were just made and were a mere tool for data repository, which were never used in future. Annual reports are formed by almost every company after spending huge amount of resources and therefore the management strives for excellence and information quality provided in them.
These reports are the means to promote the company by highlighting good aspects, gains in the past financial year and present the information to ensure that company is not mislead or wrongly perceived by any of the stakeholders. 74 Business Management and Information Systems Annual reports are developed by the management for assisting users to make economic decisions and analyze the company, but the question remains that do the investors, financial analysts and creditors really read and utilize these reports.
If they do, which aspects help them more and which aspects are ignored by them while analyzing the financial statements. This decision making is really a tough job of these users in order to use the correct information and discard all the irrelevant information. They have to be sure that they are not being sabotage by the camouflaged information. The decisions made by these users are vital in nature and they can bring damage to them if proper care is not being taken during the decision making process.
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Therefore the purpose of this study is to determine the relevance of annual reports for making an informed investment and finance decision and identifying that how annual reports can influence the perception of investors, creditors and financial analyst for making a good, informed and profitable decision. This current study analyses the use and effectiveness of Annual reports and the help which they yield to Financial Analyst, Creditors and Investors for their decisions and how much reliance can be done on Annual reports for Investment and Finance Decisions.
This study with the use of statistical testing suggests that use of annual reports will lead investors and creditors to make an informed decision. This current research progresses with Problem specification, Research question, Literature Review, Hypothesis, Research Methodology, Data Sources and Types, Statistical Analysis and Results, Suggestions, Reasons for successful and failed decision and conclusion. Problem Specification Financial decisions are one of the very major aspects within any company and these are the decisions which are made on regular basis by creditors, investors and financial analysts.
These users’ faces hundreds of situations in a day to make informed, adequate, correct, stable, valid and profitable decision. One small mistake in making a decision can yield big losses and one right move can increase the profits in millions. There is a big problem of identifying that which factors should be considered while making these decisions. Financial analyst are required to analyze the companies strength and check if that company is worthy enough to be invested in, by their clients Investors focus on the doubling of their money invested in any entity and expect high returns with less risk from their investments.
Creditors target to find the strengths and financial stability of the entity and make decision regarding the credit worthiness of the company for granting further loans or to refuse from granting any loans. In accordance to identify such factors and roles which can help in decision making this study is an attempt to identify that how the information in annual reports can help in making an informed decision. Research Question Based on the problem specification above the research question formed is as follows: “Does the information in annual reports is relevant for its users while making investment and finance decisions”
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• This study is variant from the existing studies as (based on various existing studies) • None of the studies has used annual reports for both investment and finance decisions • None of the studies is considering both empirical and descriptive aspects under one head 75 The Relevance of Annual Reports • None of the studies is describing the perspectives of all three major users, i. e. Investors, Financial Analysts and Creditors • No study revealed suggestion for further decisions and factors which lead to failure Research Methodology The study will progress with Research methodology as indicated in Figure 1. Figure 1.
Research Methodology Hypothesis Hypothesis – 1 H1: Investors use the information provided in annual reports for investment decisions Hypothesis – 2 H2: Creditors use the information provided in annual reports for finance decisions Hypothesis – 3 H3: Financial Analysts use the information provided in annual reports for guiding investors and creditors Hypothesis – 4 H4: use of annual reports provides a positive impact on investment and finance decisions Hypothesis – 5 H0: component of annual report is useful for Investment and finance decision H1: Component is not useful 76 Business Management and Information Systems Hypothesis – 6
H0: Elements of annual report is useful for Investment and finance decision H1: Element is not useful Findings and Analysis Following are the significant findings based on the data collected from 16 respondents: ? 1. 100% creditors use annual reports when it is required. 75% individual Investors use annual reports for every transaction and remaining 25% still do not deny the fact that they use annual reports and use them as and when required. 100% institutional investors use annual reports for every transaction. 50% financial analysts use annual reports for every transaction and remaining 50% use it on as and when required basis.
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2. Thus 100% users find annual reports relevant to Investment and Finance Decisions. There exist not even a 0. 01% doubt that annual reports are not relevant. Thus with 100% level of confidence one can say that there exist a strong relevance of annual reports for both investment and finance decisions ? 3. 100% creditors rely on Annual Reports for both Investment and Finance Decisions. 100% individual Investors rely on Annual reports for both Investment and Finance Decisions. 100% institutional investors rely on Annual reports for both Investment and Finance Decisions.
100% financial analysts rely on Annual reports for both Investment and Finance Decisions ? 4. All users consider Statement of Changes in Financial Position (Balance Sheet) and Statement of Comprehensive Income (Income Statement, i. e. Profit and Loss account) as the most useful components of annual report. ? 5. Elements Usefulness: With 95% level of confidence the hypothesis for component usefulness is accepted and identified that Equity, Assets, Liabilities, Debts, Share price of company, Earnings per share and Debt to Equity ratio are useful for Investment and Finance Decision. ? 6.
In the light of above data, 75% Creditors indicated that only Debt to Equity ratio is the component which alone can provide certain significant information for their Investment and Finance Decisions. 75% Individual Investors indicated that Share Price of company, Earnings per share, Dividend per share and Debt to Equity ratio alone can provide certain significant information for their decisions. 25% Institutional Investors indicated that Share Price of company, Earnings per share, Dividend per share and Debt to Equity ratio alone can provide certain significant information for their decisions.
75% financial analysts indicated that Earnings Per Share and Dividend per share are the components which alone can provide certain significant information for their Investment and Finance Decisions. 25% Financial Analysts agree to importance and individual role of Debt to Equity ratio. Remaining elements though play a vital role but are required in conjunction with other elements. ? 7. 50% creditors stated that only Annual reports can be the basis to both Investment and Finance Decisions.
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25% Individual investors stated that only Annual reports can be the basis to Investment Decisions while 50% agree that only annual reports can be the basis to Finance Decisions. 25% Institutional investors stated that only Annual reports can be the basis to both Investment Decisions and finance decisions. 100% Financial Analysts disagree that only annual reports are sufficient, they consider other information useful in association with annual reports and they consider Direct Information from Company, Stock Market, Advertisements, Market Statistics, News (TV/Newspaper), Brokers, Investors own Analysis as useful information almost equally.
The Relevance of Annual Reports 77 ? 8. “10 Years Summary”, “Company’s Profile” and “Auditors Report” are the most helpful other information provided in annual Reports. ? 9. Usefulness of other data: With 95% level of confidence the hypothesis for usefulness of all the data is accepted and thus elements have their usefulness for Investment and Finance Decisions.
These data elements include Net cash, Current liabilities, Capital structure, growth share price, profits, R & D Expense, Revenue, Expected Sales, Issued Shares, Financing cost, Net asset book value, money resources, Inventories, capital expense, borrowings, investments, subsidiaries, human resources and Net income. 10. All creditors stated that Non financial information has its own importance in their decisions. 50% individual investors agree to the importance of non financial information in decisions. All Institutional Investors and financial analysts agreed that Non financial information has its own importance in their decisions.
11. 25% Creditors sometimes base their decision by totally not using annual reports. 100% Individual Investors and 75% institutional investors always consider annual reports for their decision. 100% Financial Analysts think that they can take risk and make decision without using annual reports altogether. 12. For Creditors with use of annual reports the success rate of their previous decision is ranged between 25–75% and with non usage of annual reports the success rate of their previous decisions is ranged from 25–50%.
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For Investors with use of annual reports the success rate of their previous decision is ranged between 51–100%. Individual Investors do not make any decision without using annual reports and For Institutional Investors with non usage of annual reports the success rate of their previous decisions is ranged from 25–50%. For Financial Analysts with use of annual reports the success rate of their previous decision is ranged between 51–75% and with non usage of annual reports the success rate of their previous decisions is ranged from 25–50%. Suggestions and Other Aspects for Successful Investment
and Finance Decisions On the basis of interview targeted to identify the reasons they think contribute towards their successful decision, following suggestions are identified and presented. ? 1. Deeply study the annual reports of the major companies of the country ? 2. Thoroughly study the information in Audit Reports (Internal or External) with respect to the type of decision to be formed ? 3. The companies which are throughout in losses shall be classified in accordance and reports shall be obtained from Credit Information Bureau and copies of such information shall also be obtained ?
4. Take information from Accounts report and Directors Report issued by Credit Information Bureau as they can even prove Annual Reports wrong ? 5. PACRA rating shall be observed but it shall also be compared with the audit reports ? 6. Properly analyze annual reports and its projections before taking any investment or finance decision ? 7. Policies of State Bank of Pakistan shall also be examined and observed while taking investment and finance decisions ? 8. Market Information shall never be over looked ? 9. Observe the three C’s, i. e.
Character, Capacity and Capability of every company before taking any decision 78 Business Management and Information Systems 10. Adherence to bank’s credit policies, industry analysis, management analysis, sensitivity analysis, competitor’s analysis, Govt. regulations for that particular sector, global impact on that particular sector, collateral, track record of the customer with our bank as well as with other FIs, Micro & Macro analysis, Stock market analysis, fundamental analysis shall not be overlooked. Reasons of Success and Failure Decisions
It is identified during analysis that users that use Annual reports are almost 51-75% successful in their decisions while this percentage drops down to 25-50% if annual reports are not used for decision making. The reasons identified behind the increase percentage of successful decision with the usage of annual reports elaborates that when a user know the details of company ‘s business, its profile, profits and its future perspectives, its gives him a clear idea regarding the benefits he can obtain from the particular company.
It shows that such person can analyze the company in more detail and he also can monitor the impact of other market information and economic factors on that company. He can make appropriate decisions with respect to the available information and existing factors. If the person doesn’t have such details about the company he will be in total dark and so the risk of loss and failed decision is increased. The user may take biased decision in accordance to his perceptions without any solid reason but these decisions can however be sometimes successful by chance. Conclusion
Annual reports depict the strength of a company and provide guidelines for future scope, progress and furtherance of company. The users making investment and finance decisions can read out the security and safety in prospective years of their investments and financing. Annual reports when used reduce the chances of total loss and when annual reports are not used, decision becomes like a gamble play and it is very risky for Creditors, Investors and Financial Analysts to take their investment and finance decisions. For the current study it is thus proved that 100% specified users i.e. creditors, institutional investors, individual investors and financial analysts use annual reports, 100% specified users not only find annual report relevant for decision making but they also prefer to rely their decision on annual reports. When Annual Reports are not used in case of investment decisions then the investments may result in bankruptcy, downfall and no return. Sometimes even the principle amount invested may not be recovered. So the investment can turn into a total loss. Investments and divestments are very useful for the progress of an institution and individual.
In case of non usage of annual reports while making these decisions, it is very difficult and risky to take an appropriate decision. When annual reports are used for finance purpose it provides the facts and figures about the company and enable the creditor to take vital decision in terms of issuing and extending loans. Annual reports when are not used, the creditors will not be able to recover the financing made by them. Giving loans and finance to the companies without having an idea of company will land the creditor into an awkward position which may result in loss.
In case of usage of annual reports while making the decisions very much risk is reduced as one already get to know about the company business and other economic news and its impacts much before his being linked to that company. The Relevance of Annual Reports 79 As per the gathered data from respondents it is implied that the reliance on annual reports with respect to Investment Decision is around 70% while in case of finance decision the reliance figure is even extended to 85%.
With the current study’s statistical analysis, it is evident that one can have significantly more successful decision if annual reports are used that ranges from 25 – 75% for creditors, 51-100% for both investors and 51-75% for Financial analysts success in case of usage of annual reports. If annual reports are not used, the success rate is identified as below 25% for all users. The current study also proves that all the elements of particular component of annual reports play significant role in relevance to investment and finance decisions.
Hence it is apparent that annual reports are very useful especially in the case of companies audited by reputed audit firms and the companies which give international disclosures. Thus it is concluded that use of Annual reports in Investment and finance decision is adapted by Investors, Creditor and Financial analyst and they rely on its usage, thus confirms to the hypothesis made for this study References ? [1] Berheci, M. (2008).
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