Decision-Usefulness in Financial Reports: Research Report No.2: Relevance of Alternative Performance Measures and Non-Financial Information for Investor Decision Making in Australia

This is the second in a series of reports commissioned by CPA Australia and is based on academic research to establish whether financial reports remain useful to Australian investors. The first report in this series highlighted that, while financial reports have been criticised for increasingly not meeting the needs of users, recent Australian evidence indicates they are still of relevance to investors. While the results suggest there is room for improvement, the findings do not mark the end of accounting as we know it, as has been the call from some industry and academic writers. The availability of a substantial amount of more timely, forward-looking information from alternative sources, and concerns about the timeliness of financial reporting, have been provided as key reasons why financial reports may not be as useful for investor decision making purposes1 . It has been argued that competing information sources (for example, non-GAAP financial information) pre-empts financial statement information and acts as a potential substitute to statutory information provided in financial reports. As a consequence, financial statements do not capture value relevant events in the same time period as they are reflected in a company’s share price. Given the increasing availability of more timely forward-looking information from alternative sources, in this report we examine the relevance of non-GAAP financial information and other non-financial information for investor decision making in Australia. In particular, we will be specifically looking at the decision-usefulness of different performance metrics, including statutory profit (i.e., net income), earnings before interest and tax (EBIT) and earnings before interest, tax, depreciation and amortisation (EBITDA), as well as the usefulness of other non-financial information, to equity investors for investment purposes. This second report commissioned by CPA Australia finds that non-GAAP financial information is more relevant for equity investor decision making in Australia than statutory performance measures. Further, a broad range of non-financial information is utilised by investors in making investment decisions both as a ‘screen’ and for valuation purposes.