UK investment analyst reaction to window dressing of financial statements : a laboratory experiment
This thesis is primarily concerned with the reaction of UK investment analysts when confronted with window dressed financial statements and its implications for stock market information processing and efficiency. Three associated empirical examinations are undertaken. 1) A detailed investigation of the prevalence of window dressing in UK company accounts and the nature of such exercises is conducted using a random sample of 100 sets of accounts for large UK corporates. A substantial degree of window dressing is identified. The analysis is developedfurther to explore the relationship between extent of window dressing and financial position of the firm although the results are ambiguous. 2) To explore the importance of accounting information generally to the investment analysis community, relative to alternative sources, and the manner in which it is used to drive investment recommendations a detailed content analysis of a large sample of stockbroker circulars is conducted. The results suggest the importance of accounting information for market participants may be conventionally overstated. Nonetheless the statistical findings, although significant, are not very strong which may partially reflect the heterogeneity found in the methods used by different stockbroking firms in appraising shares. Further work is required. 3) The main part of the thesis reports on a laboratory experiment with 63 experienced stockbroking analysts drawn from five of the top City houses. The analysts were required to process company accounts and adjust for window dressed items. We were forced to conclude that, at least at the time, the research took place in early 1990, investment analysts were neither very concerned by nor able or inclined to correct for creative accounting. These findings are discussed in detail and implications for different market theories drawn. The theories conclude that there may well be valid concerns about the conventional role attributed to investment analysts as information intermediaries in maintaining market efficiency, particularly in the processing of and disseminating complex accounting information.