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Accounting information enables organizations to forecast their investment in a new business

Question:

Discuss about the Role of Accounting Information in Investment Decision Making.

Accounting information is beneficial to take long term investment decisions based on the present condition of the business sectors. However, it is important for any business organization to forecast before their investment. Hence, accounting information enables the organization to forecast about their investment in a new business. The investors rely on the accounting decision and then invest in a business. Accounting information gives a preliminary idea over the profitability, cost of the operation and loss in a business that is essential to understand the by the investors. This study deals with the effectiveness of accounting information in the decision making regarding the investment.

  • What are the methods through which the managers of Australian stock exchange use the accounting information in stock investment within an organization?
  • What are the functions of financial ratios in helping the managers to make the decision regarding the stock investment?

Role of investors in a business

Investors spend money in a venture in order to get the significant amount of return (Charles, 2008). However, often many investors are involved in a joint venture thus it is important for them to use accounting information before expanding money in a business. However, accounting information makes transparency in the investment process and it reduces the error in the accounting within the business. Therefore, the investors get confidence while investing in business by analyzing the data of accounting as they get assurance regarding their profitability for a business.

Role of accounting information in investment management

Accounting information focuses on the financial strength of the organization. Therefore, based on the accounting data percentage of the growth can be determined. Apart from this future economic outlook of an organization can be analyzed by accounting information (Eugehe &Michael, 2005). Determination of the earning per share is one of the most important areas of the investment management. Hence, the accounting data highlights on the return of the organization that is based on the earning of the company assets. However, based on the financial report the organizations are able to understand their expenditure that is needed for their business operation (ahankhani & Parsaian, 2007). The annual financial report enables a business organization to develop the strategy regarding their investment that can enhance their profitability in future. Good profitability report enables them to invest more and less profitability enable them to cut their operation cost.

Importance of financial statement in organizational decisions

According to Baker and Haslem (2015), various factors are kept in the minds of individual investor while comparing, studying and analyzing common stocks, but the dominant factors are the ones which are already anticipated or expected by the investor. Characteristics and the type of information required may differ from one investor to another. Individual investors require different set of information as compared to the professional analysts who need more vivid and more in depth data about the securities.

Investors rely on accounting decisions before expanding money in a business

But they focus on the point that the financial statement is crucial for any kind of investor to make an investment decision along with the profit forecasts. Furthermore, data analysis of other information like the business point of view, future condition of the company and its industry along with the market position of the organization, the rate in which the sales is expanding of the organization. The revenue and dividends is also required for investment information.

Lusardi and Mitchell (2014), state in their report that the traditional microeconomic approach of expenditure and savings decisions depends on a logical reasoning and a concrete information base of an individual who will consume less than his income in times of high earnings, in turn saving to back up the spending when the earning rate falls. The significance of financial literacy depends highly on the decision making of the right time of investment. Investing always depends on the time, and hence knowledge is crucial to analyze the right time. This is in case of any investor be it an individual or a professional analyst.

Financial literacy of the investors

For a larger perspective, Fernandes, Lynch Jr, and Netemeyer, (2014), have discussed the impact of financial literacy in the decision making and the financial behavior of individuals and larger firms. There are and four factors that are potentially connected with both financial literacy and the financial behaviors. These traits are confidence in accounting and financial data and information search; strategic organization for long term financial stability; willingness to take investment risk; and understanding of the math behind the investment decision.

The authors, Anderson, Baker and Robinson (2017), in their paper have stated that people usually have a set of funds that are kept aside for emergency purposes this fund is not touched or used for investment purposes it is also not used for consumption for example medical emergencies and retirement. There are at least three types of overconfidence that are found in financial behavior of people.  Firstly, is the exaggeration of an individual’s actual ability to present, or his or her chances to succeed.  The other type of overconfidence that is observed is immense faith regarding correctness of the individuals beliefs and calculations, or the analysis of the data and information gathered is spot on. The last kind of overconfidence is the psychology of an individual where he thinks he better than the average people and his decisions are better than other.

Accounting information helps in determining the percentage of growth and future economic outlook of an organization

Importance of the accounting information for investors in their decision making

The aim of the accounting information is to provide valid economic data that leads the investors to take the proper financial decision within a business (Pohl & Tyll, 2014). Investors are referred to the external users of the accounting information. Hence, the decision-making process required logical analysis of different alternatives. However, the investors want to sure about their investment and they prefer that their investment should be reasonable while transferring the financial resources. Accounting information gives them assurance about their investment that is derived from the accounting system of the company (Eid, 2016). However, it is essential for the investors to understand the every accounting information of a company in which they are going to invest. The investors divide the accounting information into main and sub part as it is beneficial for them to take the decision regarding their investment (Zaman, 2017). Identification of the significance of the main and sub factors of accounting data enables the investors to take the financial decision. Therefore, the accounting information reveals the similarities and the dissimilarities between the finance experts of an organization.

Accounting information gives a basic idea to the investors regarding the nature of the stock and price of the stocks. These areas are crucial for the investors to understand the financial strength of the company in the global market. However, based on this analysis the investors take the decision regarding such company. Application of regression model and the accounting model help the investors to carry out a proper analysis of the annual report of a business based on the financial status of the company (Hope, Thomas & Vyas, 2017). However, accounting data includes the consumer information and the sale ratio of an organization that is essential for the investors during their decision making. Hence, it is important for the investors to understand the current position of the company within the market before their investment that is done by evaluating the accounting information of such organization.

Aim of the Study

The aim of the study is to reveal the importance of accounting information in the investment decision making.

Objectives

  • To understand the role of accounting information in managing investment
  • To identify importance of financial ratio analysis in investment decision making
  • To evaluate the importance of accounting information in the decision making of the investors during investment
  • To recommend the ways in order to improve the use accounting information in investment decision making

It has been received that gathering information from different journals will be helpful to get proper information regarding the topic. Selection of an organization will be beneficial for this study in future research in order to get authentic data.

Financial statements and profit forecasts are crucial for investment decisions

The entire study is based on the secondary data. Hence, secondary data collection method will be taken in this study. Various journals, government websites, and company report will be taken in this study to understand the importance of accounting information in investment decision making. Journals and articles will be taken from the databases through inclusion and exclusion criteria and the relevant journals are selected based on the topic. The literature review is based on the secondary data. However, secondary data analysis is an effective research method of getting valid data (Silverman, 2016). Authentic data is obtained from such method by reviewing different journals.

Conclusion

The entire study focuses on the effectiveness of the accounting information in the decision-making process of the investors. However, for the investors, it is crucial to evaluate the accounting data of an organization while going for investing. This resists the investors to face loss in their investment. On the other hand, financial strength and weakness of an organization can be determined through the accounting information.

References

Anderson, A., Baker, F., & Robinson, D. T. (2017). Precautionary savings, retirement planning and misperceptions of financial literacy. Journal of Financial Economics.

Baker, H.K., & Haslem, J.A. (2015). Information needs of individual investors.

Charles P. J., (2008), “Earning Trends and Investment selection”. Financial analysis Journal, 97

Eid, E. E. M. A. (2016). The Role Of Accounting Information Systems In Making Investment Decisions. Internal Auditing and Risk Management, 42(1), 233-242.

Eugehe F. B., & Michael C. E., (2005), “Stock and their valuation”, Financial management theory and practice, 251,252

Fernandes, D., Lynch Jr, J. G., & Netemeyer, R. G. (2014). Financial literacy, financial education, and downstream financial behaviors. Management Science, 60(8), 1861-1883.

Hope, O. K., Thomas, W. B., & Vyas, D. (2017). Stakeholder demand for accounting quality and economic usefulness of accounting in US private firms. Journal of Accounting and Public Policy, 36(1), 1-13.         

Jahankhani, A., & Parsaian, A., (2007), “Investment Management”, Management faculty of university pub

Kiymaz. H, (2000), “The effects of stock market rumors on stock prices: Evidence from a market”, Journal of multinational financial management”, 105-115.

Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5-44.

Pohl P, & Tyll L. (2014),”Diminishing Role of Accounting Information for Investment Decisions”, International Journal of International Journal of Engineering Business Management

Silverman, D. (Ed.). (2016). Qualitative research. Sage.

Zaman, M. (2017). The role of financial and non-financial evaluation measures in the process of management control over foreign subsidiaries–empirical evidence in Slovene multinational companies. Management: journal of contemporary management issues, 9(2), 53-73.

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