The End of Accounting

By Baruch Lev and Feng Gu

A few deep-pocketed investors have direct access to corporate managers and can afford research teams using expensive real-time data, while most investors still rely on deficient accounting reports.

When Netflix’s quarterly earnings announcement in April fell short of the consensus estimate of analysts, its share price surprisingly rose almost 18% on the announcement. An investor blackout? No. Investors justifiably ignored the backward-looking accounting information, reacting enthusiastically to a sharp rise in the forward-looking new-subscribers indicator: 4.9 million vs. expected 4 million. Furthermore, astute investors noticed that a major reason for the earnings shortfall was Netflix’s large investment in future growth—technology development; 9% of sales—which accountants expense in the income statement.

Read the full article as published in The Wall Street Journal.

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