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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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

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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?

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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.

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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

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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.

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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

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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).

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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).

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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

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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

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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)

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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

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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,

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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

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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.

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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.

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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

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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

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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.

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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

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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

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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

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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.

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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

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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).

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

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5.3. Importance of financial accounting information

Next, the importance of different financial accounting information was

investigated. The respondents were asked to select the financial statement

items according to how important they see these in the commercial lending

progress. The aim of this question was to find out the most important

accounting information that is used by creditors. The table below counts the

amounts as a percent of the total amount of respondents who chose the

particular option. When looking only at the percentages, information about

the company’s profit/ loss was selected to be very important as 94, 1 percent

of the total amount of respondents stated so. According to the percentages,

the information about the share price seems to be least important as 23, 5

percent chose the information to be ‘rather not useful’. In addition only 11, 8

percent selected the information about the share price to be very important,

which is way less when comparing the other information in the table.

Financial accounting information % of the total amount of respondents

Very

important

Rather

important

Neither/

nor

important

Rather not

important

Not at all

important

Details of liabilities 81,3 % 18,8 % 0,0 % 0,0 % 0,0 %

Details of assets 76,5 % 23,5 % 0,0 % 0,0 % 0,0 %

Details of equity 76,5 % 23,5 % 0,0 % 0,0 % 0,0 %

Revenue 88,2 % 11,8 % 0,0 % 0,0 % 0,0 %

Profit/ loss 94,1 % 5,9 % 0,0 % 0,0 % 0,0 %

Share price 11,8 % 23,5 % 41,2 % 23,5 % 0,0 %

Dividend information 52,9 % 17,6 % 29,4 % 0,0 % 0,0 %

Operating result 82,4 % 17,6 % 0,0 % 0,0 % 0,0 %

Operating cash flow 87,5 % 12,5 % 0,0 % 0,0 % 0,0 %

Financing cash flow 70,6 % 29,4 % 0,0 % 0,0 % 0,0 %

Investing cash flow 64,7 % 29,4 % 5,9 % 0,0 % 0,0 %

Financial ratios 70,6 % 23,5 % 5,9 % 0,0 % 0,0 %

Cash and cash equivalens 58,8 % 35,3 % 0,0 % 5,9 % 0,0 %

Trade and other receivables 35,3 % 41,2 % 23,5 % 0,0 % 0,0 %

Trade and other payables 35,3 % 41,2 % 23,5 % 0,0 % 0,0 % Table 4: Financial accounting information and the percentages of the total amount of respondents.

The rank order of the importance of the financial accounting information can

be obtained from the table below. The rank order is based on the mean values

of each item. The results implied that the most important financial accounting

information was respectively profit/ loss, revenue, operating cash flow,

operating result, details of liabilities, details of assets, details of equity,

financing cash flow, financial ratios, investing cash flow, cash and cash

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equivalents, dividend information, trade and other receivables, trade and other

payables, and share price. All the financial accounting information except

share price has mean value higher than 2, 0 which indicate the importance of

all the items other than the share price. Share price with the mean of 2, 76

represent the lowest importance for creditors and has significantly different

mean value than others.

Financial accounting information

Rank Mean

Standard

deviation

Coefficient

of variation

Details of liabilities 5 1,19 0,4 33,9 %

Details of assets 6 1,24 0,4 35,4 %

Details of equity 6 1,24 0,4 35,4 %

Revenue 2 1,12 0,3 29,7 %

Profit/ loss 1 1,06 0,2 22,9 %

Share price 13 2,76 1,0 35,1 %

Dividend information 11 1,76 0,9 51,2 %

Operating result 4 1,18 0,4 33,4 %

Operating cash flow 3 1,13 0,3 30,4 %

Financing cash flow 7 1,29 0,5 36,3 %

Investing cash flow 9 1,41 0,6 43,8 %

Financial ratios 8 1,35 0,6 44,8 %

Cash and cash equivalens 10 1,53 0,8 52,3 %

Trade and other receivables 12 1,88 0,8 41,5 %

Trade and other payables 12 1,88 0,8 41,5 % Table 5: Financial accounting information and the rank order.

5.4. Useful approaches

The following question investigates the usefulness of different approaches

when evaluating potential customer. Respondents were asked to choose the

most fitting option whether the particular approach is very useful, rather

useful, neither/nor useful, rather not useful or not at all useful. These

approaches are based on accounting information and thus represent an

important part in this field. The aim of this question was to investigate the

usefulness of certain approaches in lending situations. When looking only at

percentages in the section ‘very useful’, financial ratios and trend analysis

looking five past years received the highest percentages. When only looking at

the percentages, the results implied that the least important approach is trend

analysis looking ten past years as 12, 5 percent that answered that the

approach is ‘not at all useful’ and only 6, 3 percent chose the option ‘very

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useful’. Any approach other than the trend analysis, which looked back ten

years in the past, didn’t gained option ‘not at all useful’ and thus, can be

interpreted to represent to be least useful approach for creditors. Respondents

were able to comment on each question, and one creditor commented on this

question saying that they do not tend to look back even five years. If there had

been the option of looking back two to three years, the option would have

been really useful. According to these answers, it can be interpreted that

looking into the past, customers’ financial performance is focused on looking

the recent past and it is not necessary to complete a trend analysis of ten years.

Approaches % of the total amount of respondents

Very

useful

Rather

useful

Neither/

nor useful

Rather

not useful

Not at all

useful

Trend analysis looking five past years 50,0 % 37,5 % 6,3 % 6,3 % 0,0 %

Trend analysis looking ten past years 6,3 % 50,0 % 25,0 % 6,3 % 12,5 %

Five Cs approach 37,5 % 37,5 % 18,8 % 6,3 % 0,0 %

Financial stress test 18,8 % 56,3 % 25,0 % 0,0 % 0,0 %

Financial ratios incl. two consecutive years 50,0 % 50,0 % 0,0 % 0,0 % 0,0 % Table 6: Useful approaches and the percentages of the total amount of respondents.

The following chart presents the rank orders of these approaches in order to

see which one is the most useful approach. The rank order is based on mean

values. According to the research results, the most useful approach is financial

ratios including two consecutive years. The following approaches after

financial ratios in order of the most useful ones are respectively trend analysis,

looking at the five years, five Cs approach, financial stress test, while the last

useful option is trend analysis that looks at the past ten years.

Approaches

Rank Mean

Standard

deviation

Coefficient

of variation

Trend analysis looking five past years 2 1,7 0,9 51,7 %

Trend analysis looking ten past years 5 2,7 1,1 42,4 %

Five Cs approach 3 1,9 0,9 47,9 %

Financial stress test 4 2,1 0,7 33,0 %

Financial ratios incl. two consecutive years 1 1,5 0,5 34,4 % Table 7: Useful approaches and the rank order.

5.5. Annual report

The next section investigates the most influencing annual report parts in

commercial lending. The aim of this question was to examine the differences

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in influence and investigate the order of financial statements. The respondents

were asked to choose the correct option whether the particular annual report

section was influencing their credit lending ‘very much’, ‘not at all’ or

something in the between these two. From the table below, the percentages

show that the most influencing parts are balance sheet and cash flow

statement as 94, 1 percent chose these parts to ‘influence very much’. The

lowest percent was for ‘influence very much’, which gained accounting policies

as 11, 8 percent of the total amount of respondent chose this part to ‘influence

very much’. All the annual report parts are influenced, and at least

‘neither/nor’ or more, as none of the respondents chose the options ‘influence

not much’ and ‘influence not at all’.

Parts of annual report % of the total amount of respondents

Influence

very much

Influence

somewhat

Influence

neither/

nor

Influence

not much

Influence

not at all

Corpotate information 35,3 % 52,9 % 11,8 % 0,0 % 0,0 %

Director's report 23,5 % 52,9 % 23,5 % 0,0 % 0,0 %

Auditor's report 76,5 % 23,5 % 0,0 % 0,0 % 0,0 %

Accounting policies 11,8 % 76,5 % 11,8 % 0,0 % 0,0 %

Balance sheet 94,1 % 5,9 % 0,0 % 0,0 % 0,0 %

Income statement 88,2 % 11,8 % 0,0 % 0,0 % 0,0 %

Cash flow statement 94,1 % 5,9 % 0,0 % 0,0 % 0,0 %

Notes to the financial statement 70,6 % 29,4 % 0,0 % 0,0 % 0,0 % Table 8: Parts of annual reports and the percentages of the total amount of respondents.

According to the mean values, the parts of annual report were ranked in order

to find out the most influential part. According to the research results, balance

sheet and cash flow statement are the two most influential parts of annual

report in commercial lending. The next most influential part was income

statement. Thus, the financial statements are distinctly the most influential

when comparing them to the other parts of annual report. The following parts

after the financial statements, when looking the most influencing parts, were

respectively auditor’s report, notes to the financial statement, corporate

information, director’s report and accounting policies. All the parts had the

mean value 2, 0 or better which indicates the strong agreement on the

usefulness of the annual report.

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Parts of annual report

Rank Mean

Standard

deviation

Coefficient

of variation

Corpotate information 5 1,76 0,7 37,6 %

Director's report 6 2,00 0,7 35,4 %

Auditor's report 3 1,24 0,4 35,4 %

Accounting policies 6 2,00 0,5 25,0 %

Balance sheet 1 1,06 0,2 22,9 %

Income statement 2 1,12 0,3 29,7 %

Cash flow statement 1 1,06 0,2 22,9 %

Notes to the financial statement 4 1,29 0,5 36,3 % Table 9: Parts of annual report and the rank order.

5.6. Easiness to use and general importance of financial statements

The last rating question posed to respondents included questions such as how

easy it is to use financial statements and how important the financial

statements are in commercial lending. The aim of this question was to

investigate the general idea that creditors have in regards to the financial

statements. In the questionnaire, respondents were asked to rate whether the

level of easiness to use the statements is ‘very low’, ‘low’, ‘acceptable’, ‘high’ or

‘very high’ and whether the importance of financial statements is ‘very low’,

‘low’, ‘acceptable’, ‘high’ or ‘very high’. The percentages in the following table

present how creditors evaluated the given facts. For example most of the

creditors assessed the easiness of using financial statements to be ‘acceptable’

as 41, 2 percent chose the option. The importance of financial statements is

‘very high’ as 64, 7 percent chose the importance of the statements to be ‘very

high’. Additionally 29, 4 percent chose that the importance is ‘high’.

Concluding questions % of the total amount of respondents

Very low Low Acceptable High Very high

Easiness to use financial statements 0,0 % 0,0 % 41,2 % 29,4 % 29,4 %

Importance of financial statements 0,0 % 0,0 % 5,9 % 29,4 % 64,7 % Table 10: Concluding questions and the percentages of the total amount of respondents.

From the mean values can be interpreted that the ease of using the financial

statements is rather high as the mean value is 3, 9 which is close to the value 4,

0 that stands for option ’high’. The mean value of the importance of financial

statements is 4, 6 of which is in between the options ’high’ and ’very high’, and

more specifically closer to the option ’very high’.

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Concluding questions

Mean

Standard

deviation

Coefficient

of variation

Easiness to use financial statements 3,9 0,9 22,1 %

Importance of financial statements 4,6 0,6 13,5 % Table 11: Concluding questions and mean values.

5.7. Improvements in accounting information

The last part of the questionnaire asked whether the creditors have some idea

of how the accounting information could be improved. Few respondents

stated their opinions about their ideas regarding how financial statements

could serve creditors’ work better. First, there was a need to have more

detailed information when extra-ordinary posts have occurred, even if it was

not booked as an extra-ordinary item. Additionally, another respondent

indicated the need for a better explanation in terms of extra-ordinary items.

The need was to have more clarifying notes to explain the figures when

something extra-ordinary has happened.

Another suggestion was that leasing should be treated as a debt in the balance

sheet. There was no further explanation concerning the suggestion. After the

open question about the improvements in accounting information there was

another open space where respondents were able to leave comments. There

were no final comments so it can be assumed that most of the important parts

concerning the accounting information were included in the questionnaire and

that the survey content was clear for the respondents.

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6. Analysis

This part of the thesis will look at the research results and compare them to

recent research and literature in this field. The aim of this chapter is to provide

analysis which answers the research questions.

6.1. Importance of financial statements and information sources

Research results indicated the most frequently used information sources by

creditors in the commercial lending progress. There was a remarkable

difference between the use of financial statements and other information

sources as financial statements were significantly more frequently used than

other business information sources. Financial statements were used all the

time according to 84, 4 percent of the total amount of respondents. Thus, the

results support the previous research results (Yap 1997) as the financial

statements have been seen as a major source of information.

Results of this paper imply the importance of financial statements as a primary

source of information in the decision-making process by Swedish banks. The

reasons, why banks utilize financial statements the most, and use it as a

primary source of information derive from several things. Firstly, creditors’

primary concern is whether the company is able to repay the debt with interest

(Billings & Morton 2002; Wolk et al. 2013). For paying the debt, companies

need cash. The information whether a company is generating cash, can be

obtained from financial statements (IASB 2013) and thus, the importance of

this information source is remarkable. If creditors need additional information,

they exploit other information sources. However, why there were still

creditors, who stated to use the financial statements only often, seldom or

even less frequently? The question is where do they obtain the information

about the financial standing of a company then? It can be assumed, that either

the company is previous client and thus further liquidity assessment is not

every time necessary or the credit is so small that analyzing financial standing

is not essential. Or secondly, the other sources are used in order to obtain

enough information. As some respondents answered to utilize UC7, which

offer financial analysis.

7 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).

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To obtain accounting information is easier today, as companies are signaling

their financial figures online in their webpage. This might add the usage of

accounting information as the access is easier and less time-consuming, than

for example searching for media reports. Through signaling accounting

information, companies are reducing information asymmetry. Likewise the

users of accounting information, in this research the creditors are utilizing this

information aiming to reduce information asymmetry as well (Dell’ariccia &

Marquez 2006). This argument is valid as this paper indicates the usage of

different information sources, when examining the financial standing of a

company. According to Dell’ariccia and Marquez (2006), banks can cooperate,

and through sharing of information with other banks reduce the information

asymmetry. This argument can be validated as this paper indicates that

creditors in Sweden use recommendations from others (i.e. colleagues) as a

source of information. This information source was ranked as a third most

used source (table 3: Information sources and the rank order).

The least used information source was media reports, which even 5, 9 percent

of the total amount of respondents claimed to use never. This might be due to

the fact that the signals through other information sources are sufficient for

decision-making and thus media reports are seen as unnecessary information

source. To access the information through this source might be in addition

more costly as well as more time-consuming. Hence, the actual value of the

information is lower than the actual cost of the information. Alattar and Al-

Khater (2007) analyzed the usage of information sources as well. The results

were interesting, as the second most used information source was media

releases, completely contrary to this research results. However, the results are

not fully comparable as Alattar and Al-Khater (2007) do not compare

information sources to financial statements (i.e. how much more used are

financial statements compared to the usage of other sources). In addition the

studies were not identical as the researches included divergent information

sources. Hence, the results indicate that media reports do not play a huge role

in Sweden, when comparing the importance in other business environments,

like the research in Qatar by Alattar and Al-Khater (2007).

Another similar research accomplished by Yap (1997) compared how

frequently different information sources are used. According to the results,

first most frequently used are financial statements. After financial statements

are media reports and the least frequently used are recommendations from

others. However, there is a difference to the results of this paper as the

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recommendations from others represent more frequent use than media

reports. It implies that in Sweden, it is important to cooperate and share

information with others.

As an outline, it can be concluded that accounting information seems to be

likely the primary source of information in commercial lending. This is due to

the fact that the most important information can be obtained from financial

statements, such as the information about company’s ability to generate cash.

The most important information is the most essential for creditors when they

decide to begin lending. It does not mean that the other sources do not

provide essential information, it is just less crucial than the accounting

information and this makes the information source ancillary.

6.2. Annual report and the importance of cash flow

Signaling theory explains why the focus is on annual reports as companies

signal their financial performance through diverse releases. According to

Dainelli et al. (2013) annual report is the most reliable way to communicate

between parties. In this paper, the usage of annual report compared to other

information sources support the argument by the Dainelli et al. (2013), as the

report is widely used among banks in Sweden. This research results indicate,

that all of the annual reports are influencing to creditors’ decision to pursue

lending as the mean values of each part indicates that the parts influence either

very much or somewhat. This is contrary to the findings by Yap (1997), where

some parts did not have such a strong influence to lending process. These

parts were auditors’ and directors’ reports, which probably imply that users in

Sweden are more concerned about the importance of audited reports.

As recent research has focused on cash flow information (Catanach 2000;

Dechow 1994; Ingram & Lee 1997; Jones et al. 1995; Minnis 2011; Yap 1997),

this paper looks at the importance of cash flow statement compared to other

annual report parts. Results denoted that the CFS is the most frequently used

part of the annual report, together with balance sheet. When comparing the

results to previous research (Alattar & Al-Khater 2007; Yap 1997) about how

important cash flow statement is compared to other parts of the annual report,

the outcomes are similar. That, what makes the cash flows statement so

important, is most likely the relative important information that the statement

includes. As it is all about company’s ability to generate cash, i.e. to make a

profit, from where creditors can obtain its own part.

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As Minnis (2011) investigated, audited statements have an important role in

debt pricing. Thus, creditors underline more audited financial statements. The

importance of audited reports appeared in this paper as well as the auditor’s

reports are influencing the most after the financial statements with regard to

annual reports. In addition the usage of financial statements in Sweden has a

more meaningful role when compared to research accomplished by Alattar

and Al-Khater (2007) in Qatar. The results of this research in Sweden implied

that the most frequently used financial statements are balance sheet and cash

flow statement, and the following most frequently used is income statement.

After the financial statements, there followed other parts of annual report

which order differ from the investigation by Alattar and Al-Khater (2007), as

they examined that auditor’s report was more frequently used than cash flow

statement and income statement. The difference might be that Alattar and Al-

Khater (2007) included creditors, investors and financial analysts, and the

usage of financial statements differs among these user groups. However, the

importance and usefulness of balance sheet is observable as the balance sheet

is in first place in the ranking by Alattar and Al-Khater (2007), Yap (1997), as

well as in this paper. Nevertheless, the results support the previous statement

that all the three statements can be regarded to be complementary (Alattar &

Al-Khater 2007; Yap 1997).

Additionally, in all the papers the importance of financial statements emerges

as balance sheet, income statement and cash flow statement representing the

most influencing and frequently used parts in the ranking. There was only a

small exception in the results by Alattar and Al-Khater (2007), where the

auditors’ report was ranked to be more important than cash flow statement.

The results indicated the high reliability towards audited reports in Qatar. As

the auditor’s report followed in the ranking just after financial statements in

this paper as well, likewise there is a high reliability toward audited reports in

Sweden.

As a summary can be stated, that information about company’s ability to

generate cash is fundamental in creditors lending decisions as the main

concern is the company’s ability to repay the debt with interest (Billings &

Morton 2002; Wolk et al. 2013). In order fulfill the basic requirement for

creditors; companies need generate cash and profit. As the cash flow

information simply indicate the company’s ability to generate cash, it is crucial

for creditors. Hence, it represents the most influencing financial statement

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together with balance sheet. Income statement is only slightly less used than

other main financial statements.

6.3. Importance of financial accounting information

One part of the questionnaire sought to determine the importance of financial

accounting information in creditors’ decision making. Hail (2013) noticed the

primary concern was the content of financial statements. As producing

financial accounting information is costly (Breyer et al. 2010), it is important to

consider about which information is important and relevant to its users. The

aim was to find out the most relevant information and thus where the

standard setters, such as FASB and IASB should focus on. Comparing the

outcome with research results by Yap (1997) can be interpreted whether the

users’ decision model has changed over the time. The results support one

another as the importance of earnings has not sifted behind the information

about cash. This is consistent with Yap (1997), as information about profit is

ranked first, as it is in the research results of this paper. Additionally, both

results represent similar order as the information about share price is one of

the last ones in the ranking and details of assets and liabilities are ranked in the

middle. In addition the information about financial ratios is after the

information of details of assets and liabilities, when looking the ranking

concerning how important the item is to users. This research provides

evidence that accounting information have impact on lending decisions;

however, the importance of different figures differs. The importance differ

regarding to the aim of the users, as creditors look whether the company is

able to repay the debt, the information about cash and profit/ loss is the most

essential. For investors the importance order would probably differ as

information concerning the dividend and share price might play more

important role.

Recent research has focused on the importance of cash flow information

(Catanach 2000; Dechow 1994; Ingram & Lee 1997; Jones et al. 1995; Minnis

2011; Yap 1997) and according to creditors the emphasis has been on

operating cash flow. According to previous research the cash flow has been

seen as one of the most useful corporate performance measures. This paper

evaluated the importance of cash flow information compared to other

important financial accounting information. Results of this research indicated

that operating cash flow is the third most important form of financial

accounting information. Ranked before the operating cash flow were

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42

information about profit/ loss and revenue. Hence, it denotes the importance

of operating cash flow information. Additionally, other parts of cash flow

information were included such as financing cash flow and investing cash

flow. The rank order (table 5: Financial accounting information and the rank

order) indicates that operating cash flow is significantly more important than

other cash flow information as the ranking for financing cash flow was

seventh and investing cash flow was ninth when comparing the operating cash

flow, which was third most important. Thus, creditors understand operating

cash flow such as Allen and Cote (2005) stated.

The EMH states that market reacts for accounting information, when the

financial information is utilized. Another feature is the marginal value cost of

information (figure 3: Marginal value cost of information), where the users

stop acquiring information which does not bring value. According to the

results, creditors in Sweden see information about share price rather not

important and thus do not obtain more information about it. This implies that

companies should rather focus on the presentation and signaling of useful

information such as information about profit/ loss, revenue and operating

cash flow.

As creditors base their financial decisions on accounting information, it has to

bring value to their decisions. As the main aim of business is to make profit,

the information about profit/ loss indicate the extent, to which a company has

been successful in achieving profit. Hence, the details of revenue, and profit/

loss are essential for creditors. When looking the results of this paper

concerning the importance order of financial accounting information, after the

information about company’s ability to generate cash and revenue follows

details of assets. As creditors look additional loan security, the information

about company’s asset is important. If company would have difficulties to

repay the debt, it could be considered to obtain it from the assets value.

Hence, the information is additionally crucial for creditors. However, the

information of assets are obtained generally for further security for the loan,

the importance is not that high than the information how much revenue and

cash company can generate as the main presumption is that company is

generating cash from business and thus, able to repay the loan. These

viewpoints indicate the divergent relative importance of different accounting

information.

This research results implied an exceptional point as the creditors chose

balance sheet to be more frequently used than income statement but chose the

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43

income statement information, such as revenue and information about profit/

loss, to be more important than information in the balance sheet, such as

details of assets and liabilities. The inconsistency of the results might due to

the fact that for creditors it might be difficult to distinguish what information

is important and what information they use the most. Since all information is

used, it is challenging to choose the most important one. It might depend on

the company and the circumstances of credit lending in order to determine

which information is the most useful for particular occasion. However, it

indicates the need of future research in this field.

6.4. Useful approaches

Literature review pointed out a few approaches that creditors are using when

analyzing financial standing of a potential customer. These approaches

commonly are based on accounting information and thus are important. Inter

alia Beaulieu (1994) and Kwok (2002) stated that an approach called the five

Cs is useful for analyzing the financial stage of a company. The approach has

been considered to be useful among creditors in Sweden as well, as most

respondents chose ‘very useful’ or ‘rather useful’ options when thinking about

the usefulness of the approach. As previous literature has stated (Alexander et

al. 2009; Delen et al. 2013; Kwok 2012; Talebnia et al. 2012), the importance

of accounting ratios came up in this paper as the financial ratios were ranked

first by the means of most useful approach. Accounting figures alone are not

always valuable without a comparison. Financial ratios are important for

creditors likely as they provide additional information through calculations

(Talebnia et al. 2012).

Trend analysis when looking ten years past was the least useful approach.

Commonly the time frame of ten years is too long and in commercial lending

process in Sweden, the approach is least used. This might be due to the fact

that conducting such an approach could be too time-consuming and the

benefit does not cover the cost. A more commonly used approach involved

trend analysis looking five past years but however, in some cases even five

years analysis has claimed to be too backward-looking. One creditor

commented that analysis including two or three past years is used more, than

including five past years. This is an argument for presenting financial

accounting information in a way that focuses more on the few past years

instead of only one or five or even more past years. It can be justified that

presenting two to four past years would be the most essential for creditors.

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Hence, accounting information could be possibly improved regarding to the

presentation of figures two to four past years. This is likely due to the fact that

creditors look the security that their loans will be repaid with interest and for

confirming this; they look company’s activities for longer period of time. The

other main user group, investors, might look only one or two past years, as

they might be interested to gain profit share fast and thus are not interested in

company’s past activities in longer period than that. Investors might need

security only for a short period, as they are waiting for return for a shorter

period.

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

As a concluding question the creditors were asked to rate the importance of

financial statements in general. Inter alia Francis and Schipper (1999)

hypothesized that financial statements have lost their relevance to their users,

while Hail (2013) stated that importance of accounting information is not

uncontested when it comes to valuation purposes. These arguments increase

the importance to evaluate the financial information from user point of view.

According to the respondents the overall importance of financial statements

was very high. Not one of the respondents answered that the importance

would be low, indicating that the overall importance is nevertheless significant.

This is consistent with the first part of this paper which analyzed the financial

statements as a primary source of information.

Another concluding question regarding the ease of using financial statements,

which likewise didn’t gain any negative answers, determined that the easiness

to use the statements would be rather high. However the mean value of the

answer was not as high as the mean value in the question about the

importance of financial statements. It indicates that some improvements

should be done concerning the easiness of using financial statements and

would in turn, facilitate creditors’ work and serve their demands.

6.6. Additional information need

The last part of the questionnaire sought to find suggestions that could

improve financial reporting and thus serve creditors work better. One main

matter that creditors pointed out was regarding extra-ordinary items and their

presentation. The creditors’ desires concerned the released information of

extra-ordinary items as it was claimed to be defective. Additional disclosing

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would be essential even if the item would not be regarded as an extraordinary

item. According to the stakeholder theory originated by Freeman (1984), the

main responsibility of a company is to serve its stakeholders. In order to serve

the creditors aligned with stakeholder theory, companies should release more

information about the extra-ordinary items. In addition Abdel-khalik (1972)

has argued that as the markets react for accounting information, the system is

in a good base and hence only the output could be improved. This is aligned

with stakeholder theory, which imply why the accounting signals should be

improved in a favor of creditors. According to this research results, companies

should focus on its stakeholders and release more information about the extra-

ordinary items.

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7. Conclusion

The aim of this chapter is to conclude this paper. The conclusion includes the

main findings based on the theory chapters and analysis part. The final

reflections as well as future research suggestion are presented.

7.1. Reflections

Creditors are important for the economy as a means of providing credit for a

business. They are responsible for screening out applicants whose financial

standing is weak. If creditors fail in their work, the consequences might be

huge as it might turn in lower profitability of banks and increased vulnerability

which in turn can lead to macroeconomic risks (Dell’ariccia & Marquez 2006).

In order for creditors’ to be able to work more effectively, they need relevant

information. Accounting information has an important role in banking

activities as they are aiming for successful strategies. Studies about financial

reporting have been usual research topics since the 1960s (Yap 1997), but the

field is researched more in favor of investors (Allen & Cote 2005).

Hence, the purpose of this research is to understand the importance of

accounting information compared to other sources of information in lending

process. As stated in previous research (Allen & Cote 2005) it is hard to

identify any changes in accounting information if creditor’s decision making

behavior is not well investigated. Thus, this research is investigating the role of

accounting information in banks’ decision-making process in order to initiate

the discussion of whether there are changes and improvements to be made

concerning financial reporting. An additional motivation behind the topic is

the importance towards creditors in Sweden as main provider of capital (Bird

& McEwan 2012).

First of all, the results of this thesis highlighted the importance of financial

statements when comparing these to another information sources. The use of

financial statements was significantly more frequent than the use of other

information sources such as media reports, recommendations from others,

industry information, trade associations and other sources. The result is

consistent with previous research as Alattar and Al-Khater (2007), and Yap

(2007) indicated the importance of financial statements as well. Additionally in

Sweden, creditors are sharing information with others, which imply the respect

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47

towards co-operation. Sharing information is used to reduce information

asymmetry (Dell’ariccia & Marquez 2006).

Additionally, this research analyzed the most influencing parts of annual

report. The most influencing part was clearly financial statements. The results

revealed that in creditors’ lending decisions the information about company’s

ability to generate cash is crucial, as the main concern is the company’s ability

to repay the debt with interest (Billings & Morton 2002; Wolk et al. 2013). All

the other parts were influencing too, however less, which nevertheless indicate

the relative importance of all the parts in annual report. Cash flow statement

was the most influencing statement together with balance sheet followed with

income statement, which indicates the interest toward companies’ ability to

generate cash. How much the company generates cash can be obtained from

financial statements (IASB 2013), and thus it makes financial statements more

crucial than other parts of annual report. As the financial statements represent

the most frequently used and can be regarded to be complementary; hence this

study is also consistent with previous research by Alattar and Al-Khater

(2007), and Yap (1997).

As creditors’ main concern is whether a company is able to repay the debt, the

information about profit/ loss and revenue were expectedly the most

important information for creditors. The details of assets were quite important

as well and likely due to the fact, that it will secure the repayment of a loan, if

the company does not generate enough cash. In addition, creditors are looking

companies’ past years in order to analyze the financial standing as they want

certain security for their loan. However, the results of this paper indicate that

analysis including ten past years is pretty useless and five years quite long time

frame as well. Thus, creditors are focusing more two to four past years. The

main used approach was financial ratios, which is consistent with recent

literature (Alexander et al. 2009; Delen et al. 2013; Kwok 2012; Talebnia et al.

2012).

However, there was an inconsistency in the results as the creditors chose

balance sheet to be more frequently used than income statement but chose the

income statement information, such as revenue and information about profit/

loss, to be more important than information in the balance sheet, such as

details of assets and liabilities. Hence, it indicates the need for further research

in this field.

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7.2. Future Research

The results of this paper indicate the need for future research in order to

examine the similarities and differences in usage of accounting information

and information needs between users and countries. The results of this

research and future research are accomplished in order to initiate discussion

about the relevance of accounting information and which information really is

important. These discussions might result in ideas for important changes, and

thus might improve the current financial reporting system.

During the progression of this research, few ideas for future research in this

field appeared. A first suggestion would be to include all the different

monetary financial institutions in the empirical part as having respondents

form different sectors might add value to the results. The research could use

the questionnaire developed for this paper and thus the results would be

completely comparable. This research would bring more knowledge about the

accounting information usage among all the financial institutions, not only

banks as it is in this paper. This would help companies to target their

information presentation according to the need of certain institution, which

they are using as a primary source of credit.

A second suggestion would be to conduct an experiment, where the results of

this paper are tested in a real business case. Hence, it could be analyzed

whether the experiment occasion effects differently to the usage of accounting

information compared to the situation, where online questions are answered.

It could be analyzed whether creditors act in a lending process as they state in

this paper.

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Appendix

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