Lessons learned from the financial crisis – unveiling alternative approaches within valuation and accounting theory

By | 2017-12-29T17:41:03+01:00 December 27th, 2017|

Brosel Gerrit, Toll Martin, Zimmermann Mario/ Financial ReportingRiviste / Fascicolo: 4-2012

In the aftermath of the financial crisis, one of the most topical research questions is what caused it. We argue that one of the causes is the insufficient theoretical background employed in most valuation cases. Over the last six decades, there has been constructive debate between the proponents of the various valuation theories. However, the advocates of the Anglo-Saxon valuation theory seem unimpressed by the outcomes, claiming that there is no viable alternative to their preferred theory. Consequently, they cling to unrealistic assumptions like perfect capital markets and pure competition, and thereby deepen the financial crisis by excusing overvaluation. This research presents an alternative, functional business valuation, to assist business valuation. It indicates that knowledge of the functional theory and its application might help prevent similar undesirable developments in the future. Another cause of the financial crisis, tightly connected to the cause mentioned above, lays in the (theoretical) construct of “fair value accounting” and its undesirable pro-cyclical effects. Such effects are generally considered a matter of fact, but have rarely been linked to the neo-classical Anglo-Saxon valuation theory and its major shortcomings until now. A further factor promoting the financial crisis is the assertion that there are no useful alternatives to fair value accounting and its apotheosis to the “mark-to-market approach”. A look into accounting history reveals at least one applicable alternative approach – the “historical cost principle”.

Keywords: Financial crisis, business valuation, fair value accounting, historical cost accounting

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Graphical Reporting in Italian Annual Reports during the Financial Crisis: Impression Management or Incremental Information?

By | 2017-12-22T14:55:04+01:00 December 22nd, 2017|

Aresu Simone/ Financial ReportingRiviste / Fascicolo: 1-2015

This paper investigates whether, before and during the global financial crisis, Italian firms have used financial key performance indicators graphs in the annual reports as impression management tools, to portray a more favourable picture of the firm’s performance than is warranted. This study shows that, during the financial crisis, firms have increased the number of graphs and decreased favourable distortions, although graphs continued to be designed inaccurately. The findings could reflect an increased public scrutiny on the firm’s performance, during the financial crisis. As a theoretical implication, this paper contributes to the existent financial reporting literature by showing that graphs are not necessarily used in line with an agency theory-based impression management, which is the dominant perspective to explain the graphs’ usage in the annual reports during periods of performance upturn. Moreover, it shows that the institutional context can affect voluntary disclosure practices at a firm-level. As a practical implication, this study suggests to annual reports’ readers not to necessarily consider managers as self-serving preparers in their graphical reporting strategies. The study also suggests accounting associations, audit firms and other regulatory bodies to create a set of guidelines for a correct graph’s use and design.

Keywords: Financial crisis, financial key performance indicators graphs, impression management, incremental information

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