|
Description
The key to designing research is to relate the design to the research question. Although standard setters know the motivating question, typically they do not have research backgrounds and are not equipped to develop research questions or research designs. Thus, they generally are not in a position to know what type of research is capable of addressing the motivating question. This is the expertise of researchers. Different questions dictate different designs. Different designs, in turn, result in different interpretations for the findings. A variety of research designs can result in research relevant to standard-setting issues; this section describes several of these, as examples. The designs described here are commonly used designs, but they are not the only designs that can address standard-setting motivating questions.
3.1 Valuation Research
Research designs based on valuation theory are often used to address standard-setting motivating questions. (1) This is because the conceptual frameworks of the FASB and IASB specify that the objective of financial reporting is to provide information to financial statement users, primarily providers of capital who are external to the firm, such as equity investors, in making economic decisions. (2) Equity investors also represent a large class of financial statement users. Thus, much academic financial reporting research motivated by standard-setting issues adopts an equity investor perspective. Equity investors' primary economic decisions are whether to buy, sell, or hold a firm's equity securities, all of which depend on investors' assessments of the value of the firm's equity. As a result, firm valuation is a key input into and output of investors' decisions. Thus, research adopting an investor perspective on financial reporting questions often uses a valuation approach. Also, there is a large academic literature relating to valuation, which provides researchers with a solid foundation upon which to build research designs.
The objective of valuation research is to relate accounting amounts to a measure of firm value to assess the characteristics of accounting amounts and their relation to value. The types of questions such studies address include: How well do accounting amounts measure value? What accounting amounts provide information about value? As Section 2 explains, these questions reflect the measurement and information perspectives, respectively.
Valuation-based research designs require a measure of firm value. A large body of finance and accounting research documents that the stock market is quite efficient in processing publicly available information. Publicly available information comprises a rich information set that includes not only accounting amounts, but also any other information in the public domain that investors perceive as relevant to firm valuation. As Barth et al. (2001) explain, even if the market is not totally efficient in processing the valuation implications of all publicly available information, equity market value reflects the consensus beliefs of investors. Thus, equity market value can be used to infer investors' consensus assessment of publicly available information. For these reasons, equity market value is the most common value measure used in financial reporting research. (3)
Valuation-based research designs also require a valuation model that links firm value to firm characteristics that investors value. Most valuation models are based on the dividend discount model, where price at time t, [P.sub.t], equals the expected value of future dividends, [d.sub.t+T].
[P.sub.t] = ([infinity].summation over ([tau]=1]) [R.sup.-[tau]] [E.sub.t] [[d.sub.t+T]] (3.1)
where E is the expectation operator and R is one plus the discount rate, r. To address accounting research questions, the researcher must link Eq. (3.1) to accounting amounts, which requires positing a link between expected future dividends and accounting amounts. (4)
One way to link accounting... |
More articles from Foundations and Trends in Accounting
5 Opportunities for future research on standard-setting issues.(Resear..., November 01, 2006
References.(Research, Standard Setting, and Global Financial Reporting..., November 01, 2006
Looking for additional articles?
Click here
to search our database of over 3 million articles.
|
%20%20&position=1)