Share / Print
Opinion

Financial statements are outliving their usefulness for investors — and here’s how to replace them

By Baruch Lev

baruch lev article image

It’s a radically different kind of securities analysis — the kind that would have alerted an investor to the problems at Dell in the early 2000s, for example, even as its earnings still looked impressive.

It used to be that earnings moved stock markets, but now even the “calamity” of missing analysts’ consensus forecast of earnings causes an average 1.5% drop in the share price that day — a change that’s within the range of normal.

The flip side — surpassing the consensus — boosts the price by merely about half a percentage point.

Face it: reported earnings under GAAP don’t matter as much as they used to.

And it’s not just earnings that have lost relevance for investors. The relationship between share prices and the six most important financial indicators (sales; cost of sales; the selling, general and administrative expenses best known as SG&A expenses; earnings; assets; liabilities) has decreased dramatically over the past 50 to 60 years, as the chart below shows. Our calculations show that financial reports currently provide a mere 5%-6% of investors’ information.

Read the full article as published on MarketWatch.

____
Baruch Lev is the Philip Bardes Professor of Accounting and Finance.