Corporate Financial Reporting and Investment Decisions by Shareholders

          

  Indian capital market showed smart recovery from the global financial crisis of 2008-09 and investors’ confidence has regained momentum as evidenced by increased activities and volume of trade in recent years. The number of investors seeking fortunes in the capital market is also increasing as indicated by the number of depository accounts maintained with NSDL and CDSL, the two depositories of the country. However, the philosophy of looking at stock investment as an avenue for long term wealth creation has been almost ignored by investors. They are doing more speculative trading rather approaching the market with a longterm perspective. The narrow volume of trade in the cash segment  of the stock exchanges compared with the daily average turnover clearly supports this view. In this context, the investors need quick and continuous information about the capital market in general and about the companies in particular for taking investment decisions.

 Are the investors well informed of the developments in the capital market and aware of all risk factors affecting their investment? Is the present system of corporate communication system sufficient and adequate? Can an average investor take independent and rational investment decisions based on the published information about the companies? These are relevant questions affecting investors in capital market.

The development of information technology has contributed to the fast exchange of financial information on a real time basis among the vast number of investors and stakeholders. There is free flow and ready access to this financial information to all users irrespective of the political or geographical boundaries. There is also wide acceptability of the financial reporting system which the listed companies are following today among the various users and stakeholders. The strict adherence to the accounting principles and acceptance of international accounting standards have significantly contributed to the quality of information being provided to the users of financial information. The present article intends to analyse the adequacy of the present system of Corporate Financial Reporting in taking investment decisions by investors in shares.

The Investment Environment

      The investment environment is fast changing with time and developments in the economy. Several factors have affected the psychological and behavioural attitudes of investors recently. Firstly, a strong and rapidly growing economy has created large disposable income for millions of people paving the way for the entry of  new class of investors in the capital market. Most of these new investors have little or no formal education in finance and financial investments. Secondly, the economy has seen  one of the longest and strongest bull markets in its history in the recent past. These new investors would like to attribute their high return on investment  to their own capabilities instead of being the consequence of investing during a bull market. Finally, the rise of the online trading system has led to increased investor participation in theinvestment process, allowing investors to trade, research and take quick investment decisions.

Investors have access to vast quantities of information. This information includes historical data like past prices, returns, and cor­porate operational performance, as well as current information like realtime news, prices and volume. Individual investors have access to information on the Internet that is nearly as good as the informa­tion available to professional investors. Because most individual investors lack the training and experience of professional investors they are less equipped to know how to interpret information.

Information needs of investors

Information is the key to successful investment in stock market. Investors are provided with vast information  about companies both fundamental and technical but do the investors get the right information at the right time is a mute question. There are umpteen investment advisers and consultants both in the print and visual media flush with stock tips and ideas for investments. There is no dearth of information, research analyses about sectors, companies or managements so far as there is no control on the sources or authenticity of the information or reports.

It is a sound principle of investment that the investor should have some basic knowledge of the asset class and do some homework before selecting the investment. Financial reports of companies serve the information needs of investors to a great extent. It is a statutory requirement that every company must give transparent and comprehensive information to its shareholders periodically. But there is always the information gap between the preparers of these reports and the users of these reports. The adequacy of contents, the relevance of information, the reliability and timing of the reports are always objectionable subjects of discussion in corporate communication.

Financial Reports serve the needs of various classes of users of information like present and potential investors, creditors, lenders, suppliers, customers, employees, government and the general public. It is true that all the information needs of these stakeholders cannot be met by the financial reports. But they do serve the common needs of all these parties. However, since the investors provide the risk capital of the company, they need much more comprehensive information necessary for investment decisions.  It is a fact that the majority of investors are in a bad need of future information while only a minority of them is interested in historical information. Generally, investors have greater demands for future information than historical one.  Investors have greater demands for regular and temporary reports and their demands for financial reports become less with the shortening of financial report period.(read more)