Summary of interim reporting research

The studies cited above indicate that the amount of research focusing on interim reports is fairly substantial. In addition, they show the variety of purposes for which interim reports are used. In this subsection, a few major conclusions are offered, based on the literature survey. In general, it can be said that interim reports reduce the

uncertainty related to a firm’s operations observed and monitored by outside interest groups.

First, as with annual earnings numbers, aggregate interim earnings seem to contain useful information for the market around the time of the announcement. Second, separate interim income statement components contain incremental information. The usefulness of interim reports is also supported by the fact that some firms voluntarily publish interim reports. Third, quarterly earnings time-series have both an adjacent quarter-to-quarter component and a seasonal component. Fourth, interim earnings are useful in annual earnings predictions. Fifth, some anomalous price behavior is reported. The market seems not to use all the information that reported earnings actually contain. The above findings are mainly based on studies conducted with readily available databases such as Compustat and CRSP (Center for Research in Security Prices).

Current knowledge related to other information that is published in conjunction with interim earnings is much more limited. The importance of identifying the net benefit of publishing voluminous nonearnings data has been recognized (Lev & Ohlson, 1982, p. 250):

Accounting data convey useful and timely information to investors. While this conclusion definitely holds for earnings data, the marginal contribution of the voluminous nonearnings data published in financial reports is still largely unknown. Given the nontrivial costs of information disclosure and dissemination, this issue obviously deserves more research attention.

Some recent studies provide new insight into disclosures other than earnings (Lev & Thiagarajan, 1993; Martikainen, 1990; Ou & Penman, 1989). However, each of these studies is based on annual financial statement analysis. These studies are characteristically based solely on financial statement numbers/ratios, without taking into account managers’ nonquantified analyses disclosed in annual reports along with the accounting numbers. Hoskin, Hughes, and Ricks (1986) address this deficiency. They find that qualitative comments by officers made concurrently with earnings appear to be important disclosures (op. cit., p. 28):

Perhaps the most notable and least anticipated finding is the significance of officer comments regarding the future prospects of their firms. The implication is that such comments are informative as well as credible. One possible explanation is that reputation serves to discipline officers in ways that we do not yet fully understand. Given the availability of officer comments on the Dow Jones News Retrieval Service at times other than the time earnings are announced, an extension of this study would be to investigate associations with stock returns for those comments as well. The paper’s finding are confirmed by Brown (1986, p. 36):

The finding that prospective operating data and prospective officer comments are informative for valuing firms’ common shares is the primary contribution of the study. Further research should examine how capital markets price these subjective data and should examine officer comments made at times other than earnings announcement dates.

Smith (1991) also reports that the quantitative (change in earnings per share) and qualitative commentary (management’s narrative) in annual reports are both important in explaining market reactions to annual earnings announcements. Bryan (1994), too,

finds that the management discussion and analysis contains incrementally relevant information.

The somewhat limited ability of theory to guide researchers to a fuller understanding of the use of accounting information calls for more detailed analysis with small samples. Bernard (1989, p. 106) concludes his review of capital market research in accounting by saying:

The key to further progress in this arena is to avoid being overly ambitious. There is much groundwork to be laid. The suggestions of section 5 [The role of accounting in equity valuation] - moving to more within-industry analyses, explicitly considering how the information conveyed by accounting numbers is conditioned on the economic context, gaining a better understanding of the relations among accounting numbers before introducing price data, emphasizing economic interpretation more and statistics less - may be useful in laying that groundwork.

Academic literature reviewing evidence associated with business communication seems to be based on single-firm analyses (Healy & Palepu, 1993, 1995). There is an evolving literature on the role and properties of disclosure.

Although not all of the above is directly related to interim reporting, it illustrates the areas in which new insight can be gained. Interim reports are one potentially fruitful medium of communication by a firm to its interest groups. It is likely that interim reports reflect managers’ communication propensities, especially at in the early stages of the development of interim reporting. Study of those reports will, therefore, have the potential to deepen understanding of the role of accounting in the capital markets.

Besides the above reasons for studying interim reports in general, there is a particular need for this type of focus in Finland, where information content studies have concentrated on annual financial statement information. Yet the potential benefits that investors might derive from investigation of Finnish interim reports and the lack of research determining whether or not this is actually the case are recognized (Martikainen, Yli-Olli, & Gunasekaran, 1991, p. 278):

An extremely important change in the Finnish stock market has been the improved quality and quantity of interim reports. Each listed firm must publish at least one interim report each year. So far, however, no studies exist concerning the informational value of these reports to Finnish investors.

This study is designed to help eliminate these deficiencies by adding to the very small body of literature addressing the information content of Finnish interim reports (Bergström, 1989; Laitinen, 1994; Schadewitz, 1992). One crucial element of the present research is to measure the nonearnings information disclosed in interim