The relevance of GAAP-based information: A case study exploring some uses and limitations

Assessing the relevance of GAAP-based accounting information need not be limited to studying GAAP-mandated disclosures, since such studies say little about what information the FASB should have provided. A comprehensive assessment must include a comparison of the relative roles of GAAP- versus non-GAAP-based information in the decision-making process. A study is presented that examines the information usage in the investment screening decision - the first phase of financial analysis, where the security analyst examines a potential investment candidate to determine whether it is worth pursuing. Results of the study suggest that GAAP-based information serves a screening function by quickly eliminating unattractive investment candidates. It plays another, though less significant, role in developing a positive case for investing in the company. This second decision relies largely on qualitative information, and on information about individual segments. When deciding what company to invest in, analysts seek disaggregated, future-oriented information that allows them to assess the earnings potential of individual segments.