They certainly don’t provide any news. But they do offer invaluable context to the goings on of firms today, according to a study co-authored by Jake Thornock, an associate professor of accounting at the University of Washington Foster School of Business.
Thornock’s unprecedented analysis of what and when people download from the Securities and Exchange Commission’s EDGAR database reveals that investors continue to access financial filings such as annual reports for years after their release. Despite an immediate peak in interest, the average age of download is nearly 400 days, more than a year after it was “news.”
The reason for these dated downloads? Thornock finds that investors of at least moderate sophistication seek context in old accounting information—especially to make sense of hard-to-value firms and firms that experience new shocks to earnings or market value.
“The same financial report plays a very different role in the months and years after it comes out,” he explains. “What begins as news becomes context to help investors interpret a firm’s current behavior. Rather than becoming stale or useless, these documents continue to be used and useful long after their release.”
Life after release
To better understand how investors use accounting information, Thornock and co-authors Michael Drake of Brigham Young University and Darren Roulstone of Ohio State University obtained nearly a decade of download records from the SEC’s EDGAR database, the official repository for the range of financial reporting documents produced by public companies.
EDGAR servers host 8.3 million regulatory filings. Of these, only 200,000 are “recent.” The rest are at least 30 days old. Thornock, Drake and Roulstone wanted to know whether or not these “stale” financial disclosures remain informative over time.
Their unique window into the research activities of investors offered a resounding answer: accounting disclosures do have a life beyond their release—sometimes long beyond their release. Though downloads hit the high-water mark almost immediately, financial disclosures continue to be requested at lower volumes over the ensuing months and years.
As the researchers plotted the diminishing download volumes over time, they observed mini-spikes around a given firm’s subsequent financial disclosures, news releases, product launches, earnings reports and economic shocks.
They also noted that market activity follows these mini-spikes in acquisitions of old financial disclosures. Investors trade on this “stale” information.
So historic accounting information is used by investors. But why—and, more pointedly, where—is it useful?
To answer these questions, Thornock, Drake and Roulstone compared the highest volumes of dated downloads with various firm characteristics and activities that they isolated empirically. In doing so, they were able to identify four settings in which old financial reports are most often used by (and presumably useful to) investors:
- When analyzing firms that have high financial reporting complexity.
- When analyzing firms that express more accounting discretion and subjectivity.
- When analyzing firms that have suffered a negative earnings shock.
- When analyzing firms that have suffered a negative shock to firm value.
In these settings especially, the value of old financials is in providing context.
“Historical accounting information does not play a news role. You’re not going to find surprising new information in a two-year-old 10-K,” says Thornock. “But you might find information that helps interpret a new surprise. We call this a ‘conditioning’ or ‘contextualizing’ role. And we find the role is quite important. These old documents are used pretty frequently.”
As a researcher, Thornock sees himself as an objective intermediary. He strives to determine empirically whether the efforts to produce public accounting information are providing more than just compliance. Are those reports used? Are they useful?
“All of the accounting rules and standards are meant to protect the outside investor who needs accurate information to decide whether or not to make an investment,” he says. “We try to understand whether the outside investor is getting information that is understandable, reliable, useful. We want to learn whether it’s just an exercise in compliance, or if it actually provides decision-useful information to the investor.”
In this instance, at least, Thornock finds that the information is useful, even over time. “Accounting disclosures are not just one-hit wonders that you use for a day and then throw away,” he says. “They provide different—but still important—information in the long run.”
“The Usefulness of Historical Financial Reports,” is the work of Jacob Thornock, Michael Drake and Darren Roulstone.