Miia Karilainen

Usefulness of Financial

Accounting Information in Commercial Lending

By Banks in Sweden

Business Administration Master’s Thesis

30 ECTS

Term: Spring 2014

Supervisor: Per-Ola Maneschiöld

I

Acknowledgement

First, I would like to thank my supervisor Per-Ola Maneschiöld, for his

guidance and assistance in my master thesis. In addition I would like to thank

all the other professors at Karlstad University, who were encouraging and

inspiring and providing necessary background to conduct this thesis.

Second, I would like to thank all the questionnaire survey participants, who are

working in the largest commercial banks in Sweden.

Third, I would like to thank my family and friends, who have been an

additional source of motivation. The support from fellow students is

meaningful during the whole master thesis semester.

Karlstad, 2014-6-5

Miia Karilainen

II

Abstract

Recent research has focused more on the needs and usage of accounting

information in favor of its investors. Hence, there has been less attention

towards creditors’ information needs. Additionally, it has been criticized that

accounting information has lost its relevance to its users (Francis & Schipper

1999; Hail 2013). As Allen and Cote (2005) stated, it is hard to make any

improvements to financial reporting if creditors’ decision making behavior is

not well investigated.

Thus, the aim of this research is to narrow the gap between studies concerning

the information needs and usefulness of accounting information among

creditors and investors. In addition, the companies in Sweden are financing

their operation by issuing debt rather than equity, which increases the

importance to consider creditors’ information needs, and how useful

accounting information is to them (Billings & Morton 2002; Ewing & Bhatia

2012).

The data was collected through questionnaire surveys which were sent out to

the branch managers of the biggest commercial banks in Sweden. The

questionnaire was mainly based on questions that used five point likert-scale.

Additionally, a few open questions were included.

Overall, the results of this thesis indicate the consistency with recent research.

The importance of accounting information is significant, and practically all

three main statements; balance sheet, income statement and cash flow

statement, can be regarded to be complementary. An obvious difference is in

the usage of financial statements compared to other information sources, as

respondents claim to use accounting information nearly all the time when

other sources were significantly less used.

Key words:

Financial Reporting, Accounting Information, Commercial Lending

Stakeholder Theory, Efficient Market Hypothesis, Signaling Theory,

Institutional- and Legitimacy Theory

III

Abbreviations

BAR Behavioral Accounting Research

BS Balance Sheet

CFS Cash Flow Statement

EDA Explanatory Data Analysis

EMH Efficient Market Hypothesis

FASB Financial Accounting Standards Board

GDP Gross Domestic Product

IAS International Accounting Standard

IASB International Accounting Standards Board

IFRS International Financial Reporting Standards

IS Income Statement

M&A Mergers & Acquisitions

MBAR Market-Based Accounting Research

MFIs Monetary Financial Institutions

ROA Return On Assets

ROCE Return On Capital Employed

ROE Return On Equity

UN United Nations

IV

List of figures

Figure 1: Players on the financial market December 2011 (Swedish Bankers'

Association 2013) ........................................................................................................2

Figure 2: Illustration of banks various sources of funding and the risk of

contagion effects (Sveriges Riksbank 2013). ...........................................................3

Figure 3: Marginal value cost of information. ...................................................... 12

Figure 4: Stages for valid and reliable questions (Saunders 2009, p 372) ......... 26

List of tables

Table 1: Background information .......................................................................... 28

Table 2: Information sources and the percentages of total amount of

respondents. .............................................................................................................. 29

Table 3: Information sources and the rank order. ............................................... 30

Table 4: Financial accounting information and the percentages of the total

amount of respondents. .......................................................................................... 31

Table 5: Financial accounting information and the rank order. ........................ 32

Table 6: Useful approaches and the percentages of the total amount of

respondents. .............................................................................................................. 33

Table 7: Useful approaches and the rank order. .................................................. 33

Table 8: Parts of annual reports and the percentages of the total amount of

respondents. .............................................................................................................. 34

Table 9: Parts of annual report and the rank order. ............................................ 35

Table 10: Concluding questions and the percentages of the total amount of

respondents. .............................................................................................................. 35

Table 11: Concluding questions and mean values. .............................................. 36

V

Table of Contents

Acknowledgement ...................................................................................................... I

Abstract ...................................................................................................................... II

Abbreviations............................................................................................................ III

List of figures ............................................................................................................ IV

List of tables .............................................................................................................. IV

Table of Contents ..................................................................................................... V

1. Introduction ........................................................................................................ 1

1.1. Background .................................................................................................. 1

1.2. Problem discussion ..................................................................................... 3

1.3. Research purposes and objectives ............................................................ 5

1.4. Research aim and research questions ....................................................... 5

1.5. Structure of the study ................................................................................. 7

2. Theoretical Framework...................................................................................... 8

2.1. Institutional- and legitimacy theory .......................................................... 8

2.2. Stakeholder theory ...................................................................................... 8

2.3. Signaling theory ......................................................................................... 10

2.4. Efficient market hypothesis ..................................................................... 11

3. Financial Reporting and user groups ............................................................. 13

3.1. Financial Reporting................................................................................... 13

3.2. Financial Statements ................................................................................. 13

3.3. User groups of Financial Reporting ....................................................... 14

3.4. Main user groups and the use of accounting information .................. 15

3.5. Empirical evidence of the Use of Financial Statements ...................... 18

4. Methodology ..................................................................................................... 21

4.1. Research philosophy ................................................................................. 21

4.2. Research approach .................................................................................... 21

4.3. Choice of method ..................................................................................... 23

4.4. Data collection and sample selection ..................................................... 23

VI

4.5. Questionnaire design ................................................................................ 24

4.6. Research quality ........................................................................................ 25

4.7. Data analysis .............................................................................................. 26

4.8. Limitations ................................................................................................. 27

5. Results ................................................................................................................ 28

5.1. Background ................................................................................................ 28

5.2. Information sources ................................................................................. 29

5.3. Importance of financial accounting information ................................. 31

5.4. Useful approaches .................................................................................... 32

5.5. Annual report ............................................................................................ 33

5.6. Easiness to use and general importance of financial statements ........ 35

5.7. Improvements in accounting information ............................................ 36

6. Analysis .............................................................................................................. 37

6.1. Importance of financial statements and information sources ............ 37

6.2. Annual report and the importance of cash flow .................................. 39

6.3. Importance of financial accounting information ................................. 41

6.4. Useful approaches .................................................................................... 43

6.5. Concluding opinion about the common importance and ease of using

financial statements .............................................................................................. 44

6.6. Additional information need ................................................................... 44

7. Conclusion ........................................................................................................ 46

7.1. Reflections ................................................................................................. 46

7.2. Future Research ........................................................................................ 48

References: ................................................................................................................ 49

Appendix ................................................................................................................... 55

1

1. Introduction

This chapter provides an introduction to the research topic. First, the

background and research problem is discussed. A brief concluding subchapter

about the research purposes and objectives are presented as well as the

research aim and research questions. The last paragraph introduces the

structure of this research.

1.1. Background

The economic welfare system in Sweden is well known in the world and has

been recognized as a good role model for other nations. It has been developed

over the time and stands for a social, political and economic equilibrium.

According to the Human Development Report by the UN, Sweden was

ranked seventh (UNDP 2013) which indicates the high quality of life. In 2014,

Sweden’s gross domestic product (GDP) was estimated to grow 2, 5

percentage and the following year 2015 3, 3 percentage which is the fastest

growth in the Nordic region1 (European Commission 2014). Sweden has been

aiming for full employment with equalitarian labor income, which then

expands the tax base that facilitates the high budgetary expenses (Cerra et al.

2003). In order to get the economic system working to its full potential, there

are many areas that have to be aligned.

According to Sen (2013), the basic idea behind the economic growth is that

over a long time, there is a continuous increase in per capita incomes. From

an economic point of view, the welfare is driven by business growth, which on

the contrary, is driven by mergers and acquisitions (M&A) or other financial

activities. Demand-led growth is driven by the consumer’s and the customer’s

increased demand for products and services (i.e. more frequent buying cycle

and greater quantities). Generally, companies use different marketing tools in

order to boost their business and increase their growth (Bird & McEwan

2012). In order to increase the growth, companies need financing and this they

acquire with good signals, i. e. with good financial accounting information that

reach potential capital providers.

Growth benefits all stakeholders, as companies can provide more products

and services for customers, employee benefits, better career opportunities,

1 Nordic region: Denmark, Finland, Norway and Sweden

2

shareholder’s gains, greater returns and trade customers. Through this,

partners and suppliers can achieve better commercial benefits and it improves

the overall welfare for social communities (Bird & McEwan 2012). Thus, it is

beneficial to improve the nation’s economy in order to improve the welfare of

the county’s citizens.

In order to boost the economy, expand the business, and invest in M&A,

companies need financial capital. In Sweden, there are two primary source of

financing; either through issuing a debt or equity. Today’s trend is to finance

the operation rather through debt than equity (Billings & Morton 2002) as it is

also in Sweden. The companies in the nation arrange their finance 80 percent

through debt compared to the US, where finance through debt counts for 30

percent (Ewing & Bhatia 2012). In order to reach potential financing sources

companies need to signal their performance to potential providers.

To get the economy to grow, it is essential to have functional systems for

saving, financing, payments and risk management. The system is formed of

different parties, such as banks and other credit institutions, insurance

companies, securities companies and other parties in the financial sector. The

following figure presents the players of the Swedish financial market in 2011

(Swedish bankers’ association 2013).

Figure 1: Players on the financial market December 2011 (Swedish Bankers' Association 2013)

Banks represent the most significant part of the parties in the financial market.

Other main players are mortgage institutions and insurance companies. In

2011, banks share of total assets of the financial market was 40 per cent

(Swedish bankers’ association 2013).

The figure below illustrates banks’ sources of funding, including Swedish and

international financial institutions. It implies that banks are dependent on

3

several sources of funding. The contagion risk exists as banks funding sources

are dependent on other sources and thus there is a strong interdependence

between involved parties. Banks’ core business is to provide credit and accept

deposits. The deposits mainly (43 per cent) come from Swedish households,

Swedish companies (24 per cent) and foreign public (23 per cent). The

financial sector has a main role to channel the savings into investments

(Sveriges Riksbank 2013).

Figure 2: Illustration of banks various sources of funding and the risk of contagion effects (Sveriges Riksbank 2013).

1.2. Problem discussion

Creditors (i.e. banks) have an important role in the credit market, and as they

are the major actors in the economy it is important to understand their

operation (Dell’ariccia & Marquez 2006). There has been little research about

the information needs in a favor of creditors (Allen & Cote 2005, Billings &

Morton 2002). Accounting information has an important role in market-based

economies, and for creditors and investors, the data is essential. Firstly, it

allows investors and creditors to estimate the possible return on their

investment opportunities and secondly, to monitor the use of capital once

committed (Beyer et al. 2010). Analyzing companies’ accounting information

has been an important tool for decision makers as creditors, investors,

business analysts and financial managers are utilizing the data when assessing

the performance of companies. Financial ratios are used when analyzing the

financial standing of company (Kwok 2002; Delen et al. 2013).

Additionally, the emphasis nowadays on information transparency increases

the motivation to understand further the creditors’ use of accounting

information. As Yap (1997) investigated, financial statements play an

important role when creditors decide to begin lending. The results implied that

financial statements were more frequently used than other sources of

4

information when assessing the stage of the company. Additionally, the

research implied, that the most influencing statement has been income

statement, second was the balance sheet and the third was cash flow

statement. As the shape of business and credit progresses, they change to align

with the world’s circumstances. It is essential to examine whether financial

statements still are the primary source of information and whether the rank

order of these statements has remained the same. When knowing the most

important information, it is easier to focus on its presentation. The research is

going to investigate which one of the statements is the most frequently used

and essential for creditors in their credit lending process. The expectation is

that all three statements are used by creditors when deciding to pursue

commercial lending. It is also assumed that one of these three statements will

play a more important role than the other ones. Inter alia Yap (1997), and

Alattar and Al-Khater (2007) investigated the rank order of financial

statements. In addition there has been research that examines whether the

accounting information has lost its relevance. Inter alia Hail (2013) stresses the

overall relevance of the balance sheet has remained stable, but the loss of

relevance of income statement has become current. This indicates the need for

further research. The research aim is to focus on the usage and the usefulness

of accounting information, which are important matters when discussing the

improvements of financial reporting and which information really is relevant

to its users.

For the purpose of efficient market, accounting information has to be relevant

(Adel-Khalik 1972). It has been criticized that accounting information has lost

significant part of relevance to its users. The critic has increased the amount of

researches with goal to improve the accounting information (Francis &

Schipper 1999). However the aim of this research is not to suggest any

changes to accounting information. Rather, the aim is to discuss and find out

the usefulness of accounting information. As Allen and Cote (2005) stated, it is

hard to identify changes that improve current reporting system, if creditor’s

decision-making behavior is not well investigated. Thus, it is important to

understand and keep up to date with recent research. The usefulness of

accounting information, as a favor of creditors might initiate discussion,

whether there are changes to be made according to financial reporting.

Additionally Watts (2006) stated that if the accounting information is not

useful, it could lead to the private accounting and financial system.

5

1.3. Research purposes and objectives

One of the conspicuous matters in existing literature is the lack of attention

towards creditors’ use of accounting information. Recent research has focused

more on the information demand of investors and thus ignored the needs and

interest of creditors (Allen & Cote 2005; Billings & Morton 2002). This

research is going to narrow the gap by investigating which information and

information sources are most useful in commercial lending and how they value

the financial statements.

The lending decisions in this research are comprised of only the commercial

lending decisions, excluding mortgages and personal loans. Commercial loans

focus more on accounting information and thus serve the purpose of this

research better. The purpose of this paper is to fill the gap in this field as the

usefulness of accounting information in favor of creditors is poorly researched

as looking for investors.

Nowadays companies acquire more financing through issuing debt instead of

equity (Billings & Morton 2002; Ewing & Bhatia 2012) increasing the

importance of examining creditors’ interests better. This research is going to

be accomplished in Sweden where financing through debt than equity is more

common. Hence, in Sweden creditors play more important role than investors.

In today’s business world banks have to act in a way which guarantees a safe

and efficient financial system (Dell’ariccia & Marquez 2006). The objective is

to understand the importance of accounting information related to other

information sources. Additional items, such as different assessment

approaches are investigated and analyzed to determine whether they are

important in commercial lending.

1.4. Research aim and research questions

The main aim of this research is to narrow the gap in the field by investigating

the creditors’ use of accounting information. The aim is to find out how likely

the accounting information is used as a primary source of information

compared to other sources of information. The sub-questions are specifying

the field further and when answering these questions, better conclusions can

be drawn. As with how companies in Sweden finance their operation

significantly more through issuing a debt than equity (Ewing & Bhatia 2012),

the importance towards creditors is justifiable. Literature review has indicated

6

the gap in the recent researches between creditors and investors, as investors’

needs are more researched (Allen & Cote 2005, Billings & Morton 2002).

The results are going to imply the relative importance of accounting

information compared to other sources used by creditors. It is assumed that

financial accounting information is the primary source of information when

creditors decide lending. According to the demand to focus more on creditors’

usage of accounting information the following research question is suggested:

RQ: How likely is that creditors in Sweden use financial

accounting information more as a primary source of information

than other sources of information when making credit decisions?

The research is going to answer the following sub-questions in order to find

out more about the usage of accounting information. It is assumed that

financial statements are the most important information source for creditors in

commercial lending. As the importance of cash flow information appears

continuously in accounting research, this paper is going to investigate its

usefulness compared to other financial accounting figures. Additionally the

aim is to investigate whether the importance of financial statements differ a lot

from the other parts of annual report. In the literature review few approaches

such as the five Cs approach and trend analysis, appeared as important tools

when assessing the companies’ financial standing. Thus they are included in

the thesis as the usefulness of these approaches is investigated.

1: What is the rank order of the usefulness of financial statements

and how does the usefulness differ according to other

publications in annual reports?

2: How important are different parts in annual report and how

much different parts influence creditors’ lending decisions?

3: How important the cash flow is for creditors compared to

other financial accounting information?

4: Which financial accounting information is most useful for

creditors?

5: How useful are different approaches in credit lending?

7

1.5. Structure of the study

Chapter 1 presents the background for this research and trough problem

discussion the motivation to study this field is defined. Additionally the

chapter introduces research purposes, the aim of this research and research

questions.

Chapter 2 begins with theories that provide framework for this research.

Institutional- and legitimacy theory explains that accounting information is

released as a pressure of competitive environment, stakeholder theory explains

why companies focus on creditors, signaling theory why companies signal

about its accounting information and efficient market hypothesis that markets

react for all the available information. All these theories are used to explain

what the environment between companies and creditors look like and why

they act in a certain way.

Chapter 3 presents the definitions of financial reporting and financial

statements. The main users of these releases are defined and the information

needs of the two main user groups are discussed. The last paragraph looks at

recent research in this field and states some main findings based on recent

literature.

Chapter 4 looks at methodological matters using the research philosophy.

Data collection method as well as the design of data collection are presented in

this chapter. Chapter four consider the research quality and possible

limitations of this research.

Chapter 5 presents the findings of this research. In order to present the data,

tables are used. The main tool used to create these tables and work with the

data was the survey&report tool provided by Karlstad University as well as

Microsoft Excel.

Chapter 6 uses the information in chapter two and three as well as the

research results of this paper in order to draw an analysis. The analysis is

answering to the research questions presented in chapter one.

Chapter 7 concludes this paper with final reflections. Additional ideas, that

came up through this research project concerning future research in this field

are presented.

8

2. Theoretical Framework

Second chapter provides the theoretical framework for this research. The

following accounting theories draw clear lines to this field and explain why the

environment between accounting information providers (companies) and

creditors is the way it is. The theories help to understand why companies and

creditors act how they act.

2.1. Institutional- and legitimacy theory

Institutional theory explains the behavior of the company. The strategic

choices are made in favor of the stakeholder and a company’s legitimacy is

based on the beliefs which derive from the interactions between a company

and its environment. Hence, it is important to take different stakeholder

interest to account. Additionally, institutional theory explains the accounting

choice of the companies. The theory states that companies adopt systems and

management practices that are considered legitimate by other companies in the

field. Companies are answering to the pressures that are coming from their

institutional environment as well as making choices that are socially accepted.

Companies need external financial resources which influence on companies’

choices (Moore et al. 2012). Additionally accounting has been seen as a symbol

for legitimacy (Carpenter & Feroz 2001).

The theory implies, that because of the pressure of external environment,

companies relies accounting information that is most favorable for their

stakeholders. External environment include other companies that are

operating in the same field and as they are aiming on the same goal to reach

the potential creditors and ensure liquidity, the competition is hard. Hence,

external environment effect on companies’ behavior and choices.

2.2. Stakeholder theory

Stakeholder theory is one of the most known theories in the field of business

management. The theory, originated by Freeman (1984), implies that the focus

should be rather on stakeholders instead of just shareholders. Stakeholder

theory has increased the attention towards the importance of the relationship

between companies and stakeholders. It is obvious that companies cannot

cope without their stakeholders and they are heavily dependent on these

9

constitute groups. The approach focuses on creating value for stakeholders

and has stated to be a more long-term orientated procedure than only a

shareholder approach. The main concern in stakeholder approach is to target

benefits and direct important decision-making to stakeholders. Companies

should benefit as well as exact costs from stakeholders (Ayuso et al. 2014;

Phillips 2003; Stieb 2009). The core of the theory emphasizes going beyond

stakeholder thinking and address the stakeholders’ perceptions. The theory

includes an idea about who has input in decision-making and who benefits

from the outcome. The discussion generally leads to the decision about the

distribution of the financial outputs as stakeholders are seeking compensation

for their investment (Phillips 2003).

According to stakeholder theory, the main responsibility of a company is to

maximize returns to its stakeholders. Stakeholder approach is a tool to develop

strategies, reach corporate goals and stress cooperative (Roberts & Mahoney

2004). It is crucial for companies to have strong relationship with their

stakeholders as today’s business life is considerably more chaotic, complex and

dynamic than earlier times. According to Ayuso et al. (2014) major

stakeholders are employees, creditors, suppliers, customer and the local

community. Nowadays there is a significant increase in in co-operation in

forms of strategic alliances, long supply chains, joint ventures and virtual

networks (Andriof et al. 2002).

Stakeholder theory develops a framework for this research as it theorizes the

accounting role in creditors’ decision-making. Stakeholder approach

exemplifies why the focus is on accounting information. It implies that

companies release information in order to serve its stakeholders as well as

reach own goals, i.e. ensuring cash. Companies signal through accounting

information to its stakeholders, which is used as a strategic tool by companies.

In Sweden, creditors represent a significant stakeholder group for companies,

which increase the importance towards creditors and especially to consider

their primary needs. In Sweden, the companies finance their operation rather

through debt than equity (Ewing & Bhatia 2012), which indicates the

importance of proactive stakeholder engagement. By means of this research

the wishes of the stakeholder group are taken into account as the creditors’

information need concerning the accounting information is investigated.

10

2.3. Signaling theory

In order to serve stakeholders and focus on stakeholder approach, companies

need to signal to their associates. With regard to signaling theory, it can be

understood why companies release signals to its stakeholders. Firstly, signaling

theory describes behavior when two parties have access to different

information. The sender (in this case company) usually chooses whether and

how to signal the information and another party, the receiver (this case

creditor) chooses how to interpret the information. Hence the signals focus on

the information needs of the users. Secondly, theory describes the information

asymmetry between parties, which can be reduced via signaling; the party

which has more information signals it to others (Dainelli et al. 2013; Morris

1987). Annual report has stated to be the most reliable way to communicate

between two parties (Dainelli et al. 2013). Commonly, managers have more

information about the company’s current profitability and the actual and

future investments. This information asymmetry hinders the situation inside

capital providers as they might under- and over-price companies’ profitability.

This has potential to lead to market failure (Beyer et al. 2010) as well as to bad

debt problems and cash liquidity problems (Mirtalaei et al. 2012).

Additionally signaling theory explains why companies voluntarily report

accounting information as signaling good accounting information lowers the

cost of capital. If creditors cannot access the information about the financial

standing of the company, they would likely require higher cost for capital. As a

conclusion, accounting information can be seen as a tool to reach creditors in

order to lower the cost of capital. Additionally Allee and Yohn (2009) found

out that companies that report accrual-based accounting information pay

significantly less for credit than the companies without this practice. Another

research study pointed out that the cost of debt is lower for audited companies

(Minnis 2011), and the cost of capital can be influenced by affecting the

accuracy and quantity of information available (Easley & O’hara 2004). If

companies would not report at all, it would signal bad financial standing,

which explains why companies signal accounting information even if they have

slightly bad figures. To not to report at all would signal bad financial standing

(Wolk et al. 2013). Dainelli et al. (2013) investigated the situation between

companies with uneven performance and concluded that more profitable

companies signal more information in their annual reports.

Signaling is costly for companies (Breyer et al. 2010; Morris 1987), which

increases the importance of releasing correct accounting information and

11

avoiding useless information. Correct signaling strategies should be drawn in

order to avoid costs. Signaling theory has been commonly used in accounting

research. This research can be based on the theory and premise that

companies signal through accounting information, in order to reach creditors

with the intention of lowering the cost of capital. Companies try to reduce the

information asymmetry (Morris 1987) via releasing accounting information as

well as increasing stakeholder value. Banks are trying to reduce information

asymmetry through using several information sources, such as the accounting

information. Additionally, banks can cooperate, and share information with

other banks, to reduce the information asymmetry (Dell’ariccia & Marquez

2006). For the purpose of this research signaling theory explains why

accounting information is released by companies and why banks utilize the

information. Signaling theory pays attention to annual reports, which are an

important tool when reducing information asymmetry between two parties.

Additionally standard-setters such as IASB and FASB prescribe standards

which require companies to signal certain performance measures (Dainelli et

al. 2013). In order to be attractive, these market signals have to be relevant for

decision processes (Breyer et al. 2010). Efficient market hypothesis (EMH)

explains further how much of the available information is utilized and why

creditors do not acquire all of the information.

2.4. Efficient market hypothesis

The EMH states that markets react based on all available information; such as

how accounting information would impact stock markets as well as the

operations of the securities market. The market reaction to accounting

information does not only reflect the properties, but indicates the relevance of

accounting data. Abdel-khalik (1972) states in the article that because EMH

and accounting information are related to each other and the market reacts to

accounting numbers, accounting procedure and systems are generally a good

base. However, accounting output could be improved. Thus, the theory

implies that relevant accounting data is essential for efficient markets.

The statement that markets react for all available information can be

interpreted as follows: there are actors who are trying to maximize their wealth

by trading, and when the publicly available information can be accessed at the

same time, all the wealth-maximizing actors rapidly analyze the information

and trade accordingly. It is highly assumed that security prices change, in other

words markets react to the information (Wolk et al. 2013).

12

Theory indicates that creditors use all the available information when deciding

their lending practices. Additionally, under EMH another aspect has to be

taken into account, which is the marginal value of cost of information.

Creditors might need to weigh whether certain information brings value for

their operation or whether the marginal cost of information is higher than the

real value of the information. This situation is illustrated in the figure below,

where the y-axis represents the relative information value and the x-axis the

cost of information. The information that has highest value is commonly

easiest to access and is thus less costly. Creditors base their lending using the

information with highest value and less costly. Next creditors utilize the

information that has second highest value but is slightly more costly, and so

they continue until the marginal value of cost of information and information

value for creditors cross. At this point creditors stop acquiring any further

information, as the cost of information is greater than the value of the

information.

Figure 3: Marginal value cost of information.

On the other hand it has been criticized that the financial market never

reaches a state of equilibrium. Circumstances change and people usually act

according to the newest information that is available. In other words, people

are moving towards an equilibrium target, but the target is continually

changing. People are already acting according to new information before old

information has been fully acted upon (Sharpe 2008).

13

3. Financial Reporting and user groups

The third chapter provides an overview of financial reporting and user groups.

The focus is on the two main user groups of financial reporting. The last

subchapter provides and extensive overlook at what has already been done in

this field.

3.1. Financial Reporting

The financial Accounting Standards Board’s (FASB) Statement of Financial

Accounting Concepts No. 1 and IFRS framework (IASB) defines the purpose

of financial reporting as necessary to provide information that is useful in

making business and economic decisions. The information should be relevant

for investors and creditors and it should help them to evaluate:

‘the amounts, timing, and uncertainty of prospective cash receipts

from dividends or interest and the proceeds from the sale,

redemption, or maturity of securities or loans’ (FASB 1978).

Additionally the information should include economic resources and, the

claims to them (FASB 1978; IASB 2013).

According to IASB, financial reporting has two qualitative characteristics;

relevance and faithful presentation, which indicate the usefulness of the

information. Relevant information has predictive or confirmatory value or

both, where predictive value denotes the ability to predict future outcomes and

confirmatory value provides feedback about previous predictions. Faithful

representation is free from errors, and is complete and neutral. Neutral

information does not mean that the information would not have an impact on

decisions, and being free from error does not necessarily mean accurate. When

qualitative characteristics are enhanced, they enhance the usefulness of

information. For example, when comparability is improved, this enables users

of financial reporting to understand and identify similarities and differences

among items. When enhancing the understandability, the information is

presented and explained as clearly as possible (IASB 2013).

3.2. Financial Statements

According to IAS 1 it can be concluded that the three main statements are

statement of financial position, statement of profit or loss and other

14

comprehensive income, and statement of cash flows. Additionally, standards

require a statement of changes in equity, which traditionally is not a financial

statement in many countries. IAS 1 does not prescribe any detailed layout for

the statement of financial position but does identify items that have to be

presented in the statement. One important obligation is to separate current

and non-current assets, and current and non-current liabilities as a separate

classification (IASB 2013). The statement includes three important

components; assets, liabilities and owners’ equity. Statement of financial

position commonly provides the information that helps to assess the financial

health of a company (Wolk et al. 2013). Statement of profit or loss and other

comprehensive income present the information as follows: profit and loss

account +/- other comprehensive income = total comprehensive income. IAS

1 allows that these two sections, profit or loss and comprehensive income, can

be presented in two separate pages (Walton 2011). The statement also includes

important facts such as the level of revenue and expense the company has

generated. The statement of cash flow provides cash flow information which,

according to IAS 7, demonstrates the company’s ability to generate cash and

cash equivalents; this information is further divided into operating-, financing-

and investing activities (IASB 2013). The fourth main statement, according to

IASB, identifies changes in equity, thus showing the reconciliation between the

opening and closing amounts (Walton 2011).

The objective of financial statements is to provide information about a

company’s financial position, performance and changes in financial position

that users need when they make economic decisions. The purpose of the

statements is to meet the common needs of users, which often include the

information about at company’s ability to generate cash and cash equivalents

(IASB 2013). IAS 1 prescribes the general purpose of financial statements

which is to meet the needs of users. The statement must combine all the

information regarding assets, liabilities, equity, income and expenses (including

gains and losses) and cash flow which are essential for users in order to make

economic decisions (IASB 2013).

3.3. User groups of Financial Reporting

According to FASB’s Statement of Financial Accounting Concepts No. 1

(1978) the users of financial reporting are generally owners, lenders, suppliers,

potential investors and creditors, employees, management, directors,

customers, financial analysts and advisors, brokers, underwriters, stock

15

exchanges, lawyers, economists, taxing authorities, regulatory authorities,

legislators, financial press and reporting agencies, labor unions, trade

associations, business researchers, teachers, students and the public.

Creditors, owners and employees have a direct economic interest in particular

companies as they are interested in the company’s ability to generate cash. The

company is the source of cash for investors, lenders, suppliers and employees

in the form of dividends, interest, payment for goods and services or wages

and salaries. Users expect to be compensated for their investments (FASB

1978). According to the definition provided by Wolk et al. (2013), the two

primary user groups of accounting information are creditors and investors.

Generally creditors focus on facts and numbers as they are estimating the

customers’ ability to repay loans and contrary investors focus on information

which estimate their potential for return on their investment.

3.4. Main user groups and the use of accounting information

Financial reporting and financial accounting information has an important role

for creditors and investors. Financial statements provide valuable information

about the current financial position, the changes in financial position and

company’s overall performance. Users of financial statements analyze all of the

available information for their decision-making process. There is a lot of

information such as profit before tax, gross profit, non-current assets and

current assets but these figures are not always valuable without a comparison.

Financial ratios are calculated in order to serve the information needs for the

future as well as facilitate the decision process. The most frequently used ratios

that indicate the profitability of the company are return on equity (ROE)2 and

return on assets (ROA)3, although return on capital employed (ROCE)4 is also

used. The annual report provides information from two consecutive years and

trend analysis explores the company’s performance for a longer period of time

(at least five consecutive years with a possibility of a ten year frame).The

choice of base year in the analysis is important as all of the items in the

financial statements are expressed as an index to that year (Alexander et al.

2009; Talebnia et al. 2012).

Creditors are part of the monetary financial institutions (MFIs). Sveriges

Riksbank (2013) add banks, mortgage institutions, financial companies,

2 Profit / Equity

3 (Profit before taxation + Interest) / Total assets

4 (Profit before taxation and long-term loan interest) / Net assets (Alexander et al. 2009)

16

municipal and corporate-financed institutions, monetary securities companies

and monetary investment funds (money market funds) to the MFI definition.

MFIs play an important role in the economy as they are expected to screen out

applicants who do not meet the lending standards. Failure in this field would

lead to weaker stability of credit markets. The reduction of lending standards

might result in lower profitability of banks as well as higher aggregate credit

and increased vulnerability to macroeconomic risks (Dell’ariccia & Marquez

2006). Companies generally need financing and bank loans for mergers and

acquisitions (M&A) but after the credit crisis 2008, to get a loan has become

more challenging (Sagner 2013). The economic slowdown has increased the

factors that creditors need to assess before allocating credit.

Creditors use the accounting information of a company to determine whether

it is able to pay interest in the short term, and especially the ability to repay the

loan at the expected day. Creditors look for additional loan security in the

form of assets and other valuable items that are noted on financial statements

and could be sold in order to obtain cash and repay the debt (Wolk et al.

2013). Making credit decisions commonly can be a challenge for creditors and

therefore an established procedure to investigate new borrowers and monitor

old customers is valuable to avoid credit risks. MFIs often focus on the Five

Cs approach when they decide the lending. This approach includes analysis of

character, capacity, capital, conditions and collateral, which are based on

accounting information (Beaulieu 1994; Business credit 2011; Kwok 2002).

Some creditors also include ratio analysis, cash flow sources and analysis of the

company’s loan plans to the five C approach (Kwok 2002). The Five C

approach provides a framework for creditors as well as structure to their

judgments. In the procedure, character stands for integrity, stability and

honesty while capacity is analyzed through financial statements. In order to

determine capital, creditors analyze the amount of equity investment and how

efficiently these investments are used to generate cash flows. Accounting

information is the primary source used to determine the capital (Beaulieu

1994). All external events and factors that might disturb the normal business

cycle are evaluated under the condition section of the approach. If providing

credit to a customer who operates internally, supplementary conditions such as

the stability of the foreign country and currency rates should be considered. It

is important to creditors to know the industry cycles in this stage. Collateral is

defined as property that is used as a security for debt repayment (Business

Credit 2011) and it usually includes asset valuation. It has claimed that

17

collateral alone is not enough to justify making a loan and should be used

when there are weaknesses in other areas of the Five C model (Beaulieu 1994).

The issue of bad debt has increased the importance of assessing the potential

customers regularly. Accurate company assessment helps creditors to avoid

significant losses. Nevertheless companies as well as banks are suffering from

cash liquidity problems. Consequently it drew attention within researchers and

sparked the interest to research credit lending decisions (Mirtalaei et al. 2012).

The Basel Committee has noticed the problems that banks are facing

nowadays and emphasize the importance to manage the credit risk exposure

under the credit lending. Too little risk-taking might hinder the economic

growth but on the other hand too much risk threatens the economy (Arora

2013).

Besides creditors, the other main user group of accounting information is

investors. Generally they are shareholders who need the accounting

information when they examine the value of the company’s shares in their

capital allocation progress (Wolk et al. 2013). Environment where investors

make decisions are full of investment opportunities, hence it is important to

utilize appropriate expedient accounting information (Talebnia et al. 2012).

Generally investment decisions are based on annual reports which indicate

how much profit a company has made, how much worth the company is and

how the directors saw the year and how they see the future. All the

information is not useful so it is important to consider which information to

exploit and how. As cash flow information is important to creditors, it has

important matter to investors too. Cash flow signals future performance and

thus is useful information when estimating potential dividends. The predictive

value indicates the relevance of accounting information (Wolk et al 2013).

Aliabadi et al. (2013) stated that for investors accounting information is

relevant if it is making a difference in company value. The main concern

among investors is whether to sell, buy or hold shares but as there are

extensive investment opportunities, investors must first filter the available

information. Recent research concerning the investor decision-making

behavior reveals that accounting information carries the biggest influence.

Information asymmetry often leads uninformed investors to invest in

companies that are well known or that they deem as beneficial. Companies are

providing additional pieces of information through annual reports in order to

reduce the information asymmetry. According to Talebnia et al. (2012) a low

level of disclosure increases the cost of capital. By releasing more information,

18

companies reduce information asymmetry and extend the interest on shares

(Leuz & Verrecchia 2000).

3.5. Empirical evidence of the Use of Financial Statements

There are several studies about the usage of accounting information. The

inconsistencies in this field stem from the fact that investors’ usage has been

investigated more than creditors. Inter alia Wolk et al. (2013) states that

theories under the usefulness of accounting information are not well

developed when it comes to creditors. Stephens (1980; cited in Kwok, 2002,

p.351) examined the usage of financial statements in bank lending decisions

with the intention to increase the scope of decision process research.

This paper is going to investigate additionally the importance of financial

statements compared to other sources of information. Inter alia Sawalga

(2012) explored the most important information sources concerning the

investment situations. The results implied that according to the investors,

corporate annual reports are the most important source for the purpose of

investment decision-making. The following used sources were respectively

daily share prices, corporate websites, newspapers and magazines, advice of

friends, discussion with company staff, stockbrokers’ advice and tips, and

rumors. The research was conducted in Iran where according to the research

results, investors weighed more the usage of written information rather than

verbal information for the purpose of investment decisions (Sawalga 2012).

Another research about the importance of financial statements as a source of

information accomplished Yap (1997), which examined both, investors and

creditors. The results implied that even though the importance of cash flow

statement has been noticed, the statement has not become as a substitute for

balance sheet and income statement. The research implied that the most

influencing statement under credit decisions is income statement, second

balance sheet and the third cash flow statement. Alattar and Al-Khater (2007)

examined as well the usefulness of information sources in decision-making

process. They examined the importance of other sources not comparing them

to financial statements and thus not indicate how much more used financial

statements are compared to other sources.

Recent research has focused extensively on the importance of cash flow

information. Allen and Cote (2005) stated that the creditors’ primary focus is

solvency and secondary concern profitability. The information about liquidity

cash flows plays an important role for creditors as they try to identify

19

companies’ ability to generate cash flow from business as the main concern is

whether the customer is able to repay the loan. Thus, it is highly assumed that

creditors understand the operating cash flow (Allen & Cote 2005). Yap (1997)

investigated the importance and use of cash flow in lending decisions. The

results indicated the usefulness of CFS to make decisions especially concerning

liquidity, solvency and financial flexibility matters. Additionally many recent

studies (Catanach 2000; Cheng et al. 1996; Dechow 1994; Ingram & Lee 1997;

Jones et al. 1995; Minnis 2011; Yap 1997) indicated the importance of cash

flow, especially operating (Allen & Cote 2005) cash flow information when

assessing the financial stand of company. Cash flow information has been

used inter alia as an indicator of credit quality (Billings & Morton 2002). Kwok

(2002) investigated the usage of cash flow information and cash flow

statement in lending decisions. The outcome of the research exemplified that

during the lending process, not all of the cash flow information was obtained

from the cash flow statement. Other options to acquire the information were

through balance sheet notes and other reports (Kwok 2002). Allen and Cote

(2005) investigated whether the theories about the use of cash flow

information by creditors is true in practice. The outcome was that company’s

earning still dominates creditors’ decision-making. However, the income

statement has been seen as one of the most important sources by some

analysts as it provides the data which is used for forecasting subsequent

periods’ earnings (Ohlson & Aier 2009). It seems like all the statements are

essential for decision-making and can be regarded to be complementary

(Alattar & Al-Khater 2007; Yap 1997).

Inter alia Minnis (2011) investigated how financial statements influence debt

pricing. The results implied that audited companies have lower cost of debt

thus there is more weight on audited accounting information. Hence, it can be

assumed that creditors use auditors’ reports when they decide to offer a credit.

Gopalakrishnan and Parkash (1995) investigated the perception of accounting

information in lending agreements from the point of view of both, the

borrower and the lender. The results pointed out that debt-to-equity ratio and

tangible net worth covenants contribute to the technical default. The top three

factors in choosing accounting methods were ranked to be debt covenants,

industry convention and the level of reported income. Chung et al. (1993)

researched the creditors’ use of accounting information in the oil and gas

industry. They explored actual lending agreements in order to find evidence.

The results indicated, that especially in that industry, creditors highlighted a

need to obtain collateral for these loans.

20

Jones et al. (1995) researched the usefulness of accounting information from

the point of view of several users such as manager, investors and creditors and

findings indicated more frequent use of cash flow information for creditors.

Additionally, recent research has found that cash flow information has been

important for creditors as it estimates the future cash flows. When the

earnings and cash flows are positive the future cash flows are expected to be

positive and contrary if both are negative, the future cash flows are expected

to be negative (Barth et al. 1999; Sloan 1996). The estimation is important as

creditors are evaluating the companies’ ability to repay the loan (Billings &

Morton 2002).

Research in the field of the usage of accounting information has been

accomplished more from the investors’ point of view. Inter alia Barton et al.

(2010) investigated the most valued performance measure around the world by

investors. The results implied that investors all around the world do not value

the same measures the most but when it comes to the information of cash

flows, the information is relevant for all. Barton et al. (2010) suggested that the

standard setters should focus more on the information relevance instead of

concept of the best measure. Little research has focused on investigating

accounting information as a balance sheet and income statement numbers

have lost their relevance. The results pointed out that the overall relevance of

the balance sheet has remained stable but at the same time the loss of

relevance of income statement has become current (Hail 2013). The concern

of the accounting information relevance notably for creditors, investors and

managers has increased the importance towards researching the usefulness of

accounting information more. Lawrence (2013) examined individual investors

and concluded that they invest more in companies with clear and concise

financial accounting information.

21

4. Methodology

In this chapter the research approach and choice of method is explained. The

data collection progress and sample selection are shortly discussed.

Additionally research quality and limitations are considered.

4.1. Research philosophy

Philosophical aspects have to be taken into account when designing a research

method. All research methods are related to research philosophy and in order

to have a good understanding of the research; philosophical concepts have to

be at least somehow familiar. Key constructs in the philosophy are ontology,

epistemology, methodology, methods and paradigm (Eriksson & Kovalainen

2008). Two main types of research philosophy are ontology and epistemology

(Bryman & Bell 2007).

Ontology is a theory of the nature of social entities (Bryman & Bell 2007). It

concerns the relationship between people, society and the world. ‘What is

there is the world’ stands for the basic questions behind ontology. When

conducting research, what is worth to studying must be considered. The

ontology philosophy can be further divided into two aspects; objectivism and

subjectivism. Epistemology concerns the questions that ‘what is knowledge

and what are the sources and limits of knowledge’. In the research it is closely

related to the ontology claims, and thus they are often discussed together.

Epistemology refers the ways of acquiring knowledge and can be further

divided into two views; objectivist and subjectivist (Eriksson & Kovalainen

2008).

4.2. Research approach

Research traditions commonly are divided into deductive and inductive

reasoning. According to Bryman and Bell (2007) inductive theory comprises

the relationship between theory and research on commonest point of view.

First the theory is developed and then the researcher tests it with empirical

observation by using hypotheses in order to obtain an outcome. Deduction

reasoning state that theory is the first source of knowledge (Erksson &

Kovalainen 2008; Wolk et al. 2013). A large part of the research uses the logic

of hypothesis testing in the empirical world. It has been noticed to be lacking

22

and thus induction in research has gained more attention and stand (Eriksson

& Kovalainen 2008). Another approach, inductive reasoning consists of data

collection which is used when developing a theory. Research progress

develops theories from observations. Qualitative studies generally use the

inductive approach but some kind of deductive features can be combined.

Deductive and inductive approaches more clearly demonstrated (Bryman &

Bell 2007):

deductive: theory observations/ findings

inductive: observations/ findings theory

The approach of this research is combining both approaches. This is because

the theoretical framework has been build according to recent research as well

as books. Theoretical framework has been the basis when constructing the

empirical findings. After the empirical findings has been tested using

theoretical framework rather than testing the theoretical framework with

empirical findings. This approach show whether the findings are in line with

the theories and if it not, the research is developing a new aspect to the

existing theory.

Financial accounting research has focused on the reporting of business

activities already in long run. This is due to the fact that it is essential to make

a business accountable to its owners and creditors. It has been criticized that

accounting choices should be based on the needs of the users of financial

statements. As the focus of this research is on the one of the main user group

of financial statements, the favored objectives and approaches have to be

taken into account. Decision-usefulness approach implies two types of

empirical study; behavioral accounting research (BAR) and market-based

accounting research (MBAR). This research approach is BAR as the focus is

on the decision processes and decision outcomes of individual users. This

approach includes different methods such as surveys, field studies, laboratory

experiments and field experiments. The approach of this research is survey,

more specifically questionnaire survey as surveys commonly focus on attitudes

and opinions and has focus on information needs. Case studies are mostly

seen as small-sample studies, where a researcher selects a sample from the

population and draws conclusions by studying the sample. When looking at

the process from this perspective, case studies have a small sample from which

it is difficult to run any statistical tests (Ryan et al. 2002). Surveys are often

23

used in order to answer questions who, what, where, how much and how

many (Saunders 2009).

4.3. Choice of method

There are two common options for collecting information; through qualitative

or quantitative methods. The qualitative method produces any kind of results

that are not arrived by means of statistical procedure or other quantifications.

The quantitative method utilizes quantitative analyses of numbers or other

data that can be converted into numbers (Saunders 2009). Both methods have

advantages and disadvantages, so it is important to choose the most

appropriate one when looking for the research purposes, objectives and

research questions. For this research the combination of both methods was

the most appropriate choice.

This research includes mainly qualitative data which can be further termed as

categorical data. Qualitative data can be divided into ordinal and nominal data,

where ordinal scale indicates the rank order between categories and nominal

scale where categories cannot be ordered (Saunders 2009). The main part of

the questions uses ordinal scale.

In order to serve research purposes, the survey questionnaire method was

used to collect primary data. The questionnaire was developed to be online

and easy to answer in order to increase the willingness to participate.

Questions were developed so that they could best serve the research purpose

and accurately measured what they were supposed to measure. There was no

need to collect secondary data as it would not help for further understanding.

4.4. Data collection and sample selection

Quantitative and qualitative methods consist of different data collection

methods. The most convenient data collection method was an online

questionnaire. Respondents were selected by choosing the four biggest

commercial banks in Sweden which are Handelsbanken, Nordea, Swedbank

and SEB (Swedish bankers’ association 2013). The choice of the research

object was based on this information. The sample includes offices in the ten

largest cities in Sweden, as the commercial lending is larger part in bigger

cities. The choice to utilize the four biggest commercial banks in the ten

biggest cities in Sweden was based on the belief that including more examinees

would not be necessary; a smaller sample size would be sufficient to obtain a

strong understanding of the research questions.

24

The contact addresses were acquired online and phone calls were made during

the data collection to gain more respondents. In order to attract ideal

respondent, the research purpose and topic were briefly introduced in the e-

mail where the link to the online questionnaire was provided. Overall 18

branch managers replied, thus the data analysis is based on the answers of this

sample. The sample is sufficient and represents the creditors in Sweden as the

respondents were mainly branch managers, who are in response for

commercial lending for a larger area than just one city in Sweden.

4.5. Questionnaire design

It was essential to design the questionnaire in such a way as to collect the

required information for the research topic. The literature review and the

research plan indicate the right direction for the questionnaire. It is also

important to choose the right type of questionnaire. For the purpose of this

research, the self-administered questionnaire was the most appropriate one as

it is completed by respondent. Internet-mediated questionnaires are used to

increase the ease of response for participants (Saunders 2009).

The research questions and the aim were used when designing questions in

order to gain relevant data. There are different question types, which might be

either an advantage or a hindrance depending on the context of use. This

research includes a combination of different question types such as open

questions and ratings. Most of the questions are based on the five-point likert

scale, which indicates the strength of agreement. Likert scales are used to

locate the level of agreement and can be rank ordered, but how much more

respondents agree cannot be interpreted (i.e. choice five is not five times more

than choice one). Likert scales are useful when the wording of the questions is

correct (Bell 2010). Additionally, open questions were used as a part of the

questionnaire in order to acquire more detailed answers (Saunders 2009).

Developing the questions was a critical part of this thesis as there is a wealth

of research in this field. As a result it is important to develop questions that

are aimed to fulfill the research gap and produce updated research results.

One important aspect when designing the questions is the language, as some

respondents may understand questions in a different way than intended by

researchers. It is important to pre-test the questions in order to avoid

misunderstandings and ensure comprehension. Two university professors and

one fellow student read the questions, which also increased the research

quality. An untidy questionnaire will lose its impact even of it is carefully

25

prepared. In order to create a clear and concise questionnaire, the program

provided from the university was used.

4.6. Research quality

Regardless of method used to collect the data, it must be critically assessed for

reliability and validity. Reliability indicates whether the research results are

repeatable; it is the extent to which a research project produces the same

results under stable conditions (Bell 2010). When assessing the reliability of

this research it is difficult to determine how replicable the results would be due

to the fact that external factors might affect the respondents’ answers. It is

likely in this case that the reliability of banks and its employees is high as the

external factors should not affect their work.

More complex context is validity. Commonly it defines whether particular

questions really represent the concept they are supposed to and whether it

measures or describes what it is intended to. A reliable item is not necessarily

valid which in this situation means that research implies the same answers

different times but does not measure or describe what it is supposed to do

(Bell 2010). In order to increase the validity of this research, the questions

included in the online questionnaire need to be carefully designed. In order to

design the questions, extensive background work is done. It was important to

have a lot of knowledge about the subject and understand how accounting

information is used and why it is important for its users. In order to increase

the validity of this research and avoid observer bias, the research questions

were pre-tested. In order to test the understandability and language of the

questions, two professors who are working with financial reporting and one

fellow student read the questions through. In this way misunderstandings and

language problems were avoided and tested whether the questions measure

what they were supposed to from others point of view.

To focus on validity it is important to get the right people to answer the

questionnaire, which were the people who use accounting information in

lending processes. The focus was on the biggest commercial banks in Sweden,

which were obvious users of accounting information. The respondents have

been working in the biggest commercial banks in Sweden and are using

accounting information in their work and therefore it can be assumed to have

high validity in this research. When the validity is high, the conclusion should

apply for the whole population and not only for a part of it. As this research

validity is rather high, the sample did not have to be great. Another aspect that

26

affects to research validity is the participant error. This can occur for example

when the examinees are answering the questions at different times of the week

or after different occasion. It is not an issue in this research as it can be

assumed that respondents answer with truth no matter how the circumstances

are at the work when the answers are dealt anonymously.

Another fact that increased the validity was the easiness to answer the

questions and that the answers were dealt with high confidentiality and

anonymity. Answers were never connected to the respondents which indicate

to the respondents that they can answer truthfully. The following chart

presents the stages that have to occur in order to have a valid and reliable

question (Saunders 2009).

Figure 4: Stages for valid and reliable questions (Saunders 2009, p 372)

4.7. Data analysis

Surveying to collect data allows the collection of qualitative data that can be

analyzed by using descriptive and inferential statistics. The explanatory data

analysis (EDA) approach uses diagrams to explore and understand the data,

and thus is applicable for this research. This approach proposes the possibility

to look at previously unplanned analyze as an aim to gain new findings when

looking other relationships in the data (Saunders 2009).

Qualitative data comprises mainly categorical data which can further be

divided into descriptive and ranked data. Ranked data, i.e. ordinal data can be

rank ordered. The choice was to use five point likert scale which indicates the

strength of an agreement. According to the likert scale results, tables (notably

contingency tables) are used so that the data can be easily compared to each

27

other (Sounders 2009). For example, by comparing the frequency of usage of

certain information, it can be discovered whether the financial statements are

the most used information source for creditors when they decide to lend. To

describe the central tendency, mean, mode and median are advisable

measurements. Open questions are analyzed by using deductive and inductive

approaches. Based on the responses, key terms themes are identified and

analyzed and compared to existing literature. Afterwards, conclusions can be

drawn.

4.8. Limitations

One main limitation is the rather low response rate. According to Saunders

(2009) response rates for web based requests are likely to be really low and

thus non-response biases might occur. Additionally, it has been challenging to

obtain a representative sample. The limitation is in a substantial part of this

research as the response rate is rather low. Additionally, contacting the

examinees were difficult as banks do not always provide contact e-mails online

and when calling they are not showing willingness to participate surveys.

Another limitation was the language of the questionnaire. Even in Sweden the

English language skills are one the best in the world (Nylander 2013),

conducting a questionnaire in other than mother language might restrict the

willingness to participate. Even though the language skills are good, the

accounting terms and words might not be in everyone’s memory and it would

be time taking to start to translate them. Additional method limitation is the

online questionnaire, as creditors might not want to open an online link as

they cannot be sure of its security risk and they do not know who is really

behind the e-mail.

28

5. Results

This chapter provides a presentation of the collected data. In order to best

illustrate the results, tables are developed according to the collected data. The

main tool used in this section is Microsoft Excel and survey & research tool

provided from the University. In order to analyze the data, descriptive

statistics were used, namely frequencies and measures of central tendencies.

5.1. Background

Basic background information was collected in order to gain the necessary

information about the respondents. Females represent 38, 9 percent, while

males accounted for 61, 1 percent of total respondents. The respondents are

currently working in the largest commercial banks in Sweden and the offices

were located in the biggest cities, such as Stockholm, Gothenburg, Malmö,

Uppsala, Orebro and Helsingborg. In order to raise the reliability, respondents

are mainly the branch managers who are mostly responsible for a larger area

than just the city of the bank they are working in. The age distribution among

the respondents is distributed evenly among all of the age groups.

Additionally, information on the education background of respondents was

collected, and it was found that most of the respondents hold either bachelor

or master level degree. One fact that increases the research validity is the fact

that the majority of the respondents have more than 20 years of relevant work

experience in the field, in other words the experience will certainly help in

understanding the meaning and importance of the issues and thus the answers

are more reliable. The following table illustrates the main facts about the

respondents.

Background information % of the total amount of respondents

Age Relevant working experiment in the field Bank where I work is located

Under 26 5,6 % Up to 5 years 5,6 % Stockholm 29,4 %

26-35 11,1 % 6-10 years 11,1 % Gothenburg 11,8 %

36-45 22,2 % 11-15 years 16,7 % Malmö 23,5 %

46-55 33,3 % 16-20 years 0,0 % Uppsala 23,5 %

56-65 27,8 % more than 20 years 66,7 % Orebro 5,9 %

Over 65 0,0 % Helsingborg 5,9 % Table 1: Background information

29

5.2. Information sources

The following section investigates the most frequently used information

sources. The respondents were asked to indicate how often they use

information sources, such as media reports, financial statements, and

recommendations from others, industry information, trade associations and

other sources by choosing the most proper option according to how often

they use these sources. The aim of this question was to investigate the relative

importance of financial statements compared to other information sources.

The table below presents the amounts of in percentages of the total amount of

respondents that chose a particular option. The results implied that financial

statements were the most frequently used information sources as 84, 4 percent

of the total amount of respondents claimed to use the source all the time. The

difference between the use of financial statements and other information

sources is significant, as the second, most frequently used source was industry

information but only 17, 6 percent of the total amount of respondents claimed

to use the source all the time.

One respondent commented on the other source options and stated that when

assessing the possible new customer, creditors in Sweden are using UC, 5

which is providing business and credit information. Also, the internal

information shows how well the customer has served its current debt, and this

is used in lending decisions.

Information Sources % of the total amount of respondents

All the time Often Once in the while Seldom Not at all

Media reports 0,0 % 29,4 % 35,3 % 29,4 % 5,9 %

Financial statements 82,4 % 11,8 % 0,0 % 5,9 % 0,0 %

Recommendations from others 11,8 % 47,1 % 17,6 % 23,5 % 0,0 %

Industry information 17,6 % 47,1 % 23,5 % 11,8 % 0,0 %

Trade associations 6,3 % 31,3 % 25,0 % 31,3 % 6,3 %

Other sources 17,6 % 23,5 % 23,5 % 29,4 % 5,9 % Table 2: Information sources and the percentages of total amount of respondents.

The following table provides the mean values of the particular information

source. According to the mean values, the information sources were ranked.

The ranking indicates the order about which information source is most

frequently used in commercial lending process. The results implied that the

5 UC group: Offer reports as well as credit monitoring and qualified financial analysis. UC’s

database includes the information an all companies registered in Sweden (UC 2014).

30

most frequently used sources were respectively financial statements, industry

information, recommendations from others, other sources, trade associations

and media reports. The results provide empirical support that financial

statements have kept their position as a most used information source, i.e. the

results indicate the usefulness of accounting information in commercial

lending. Standard deviation indicates the dispersion and how close the data is

to the mean. The coefficient of variation is the relative standard deviation,

which indicates the extent of variability in relation to the mean (Hand 2008).

Information Sources

Rank Mean

Standard

deviation

Coefficient

of variation

Media reports 6 3,1 0,9 29,8 %

Financial statements 1 1,3 0,8 59,6 %

Recommendations from others 3 2,5 1,0 39,8 %

Industry information 2 2,3 0,9 40,1 %

Trade associations 5 3,0 1,1 36,5 %

Other sources 4 2,8 1,2 43,8 % Table 3: Information sources and the rank order.

Additionally, one open question according to the information sources was

added where the respondents were asked to express more about the important

information sources and the use of them. There were few answers and they

were answered very briefly. Few respondents emphasized the importance of

financial statements and annual reports as the sources they utilized the most,

and they provide the most relevant information for the creditors’ needs.

Companies’ recent economic behavior is examined using the information in

annual reports, and in addition, the future behavior and possible results are

regarded. In order to look into the future, companies’ cash flows are evaluated.

Few respondents stated the importance of UC6 in the commercial lending

progress. As the commercial and financial risks are evaluated, creditors need

accounting information to complete these calculations. Additionally, the

company’s business model is assessed for the purpose of lending choices.

Thus, the emphasis is on the information that provides facts about the

company’s past economic behavior and information about how the company

would behave economically in the future.

6 UC group: Offer reports as well as credit monitoring and qualified financial analysis. UC’s

database in