The Subcommittee's analysis of the information needs of investors and creditors is based on the Subcommittee's database of materials on users' needs for information dated May 17, 1993. That database is based, in turn, on the Subcommittee's activities over the last eighteen months, which fall into five broad categories:

1. Study and analysis of documents written by investors and creditors or based on research directly with investors and creditors about their needs for information

2. Formal meetings with the Subcommittee's Investor and Creditor Discussion Groups

3. Meetings with (a) the Financial Accounting Policies Committee of the Association of Investment Management and Research and (b) the Accounting Policies Committee of the Robert Morris Associates

4. Informal meetings with other investors and creditors

5. Research sponsored by the Subcommittee about the types of information included in analysts' formal reports about companies.

This section discusses the scope of those activities and the reasons why the Subcommittee undertook certain projects and rejected others.

Study and Analysis of Documents Written by Investors and Creditors or Based on Research Directly with Investors and Creditors about Their Needs for Information

The Subcommittee began its study with a literature search of books and articles, focusing on those that suggested improvements in external reporting. The Subcommittee built an automated database of that literature, including references to over 200 documents, and analyzed the contents of the database.

Unfortunately, the initial database of information was not able to provide sufficient information about the information needs of investors and creditors. Few of the materials in the database were written by investors or creditors or based on research directly with investors or creditors (direct documents). Rather, the materials were generally written by accountants, standard setters, regulators, and academics. The recommendations in the materials by those authors were usually based on accounting theory or intuition rather than on the information needs of investors and creditors. Relatively few of the articles referred to the users of financial statements. Those that did usually speculated about what would be helpful to users rather than basing recommendations on direct research with users.

The Subcommittee concluded that its initial literature search and database did not provide sufficient data on which to base its report to the Committee on the information needs of investors and creditors. As a result, the Subcommittee undertook a second literature search, focusing on direct documents.

The second literature search surfaced some relevant direct documents. However, the Subcommittee concluded that those documents alone did not provide a sufficient basis on which to report to the Committee. Thus, the Subcommittee concluded that it would need to supplement the information in the direct documents with additional research about the information needs of investors and creditors either performed directly or sponsored by the Subcommittee. That conclusion resulted in the activities described in the following sections.

Meetings with the Subcommittee's Investor and Creditor Discussion Groups

In the Fall of 1992, the Subcommittee formed two groups of users for a series of formal face-to-face meetings to:

1. Obtain answers to questions and cover in more depth issues about the information needs of investors and creditors that had surfaced from the Subcommittee's analysis of research

2. Obtain investors' and creditors' reactions to the Subcommittee's tentative conclusions about the information needs of investors and creditors and the Committee's preliminary recommendations to improve external reporting

3. Provide a vehicle for the Subcommittee to meet other investors and creditors for additional follow-up and in-depth discussions.

In forming the groups, the Subcommittee sought participants with diverse experiences and perspectives. The twelve members of the Subcommittee's Investor Discussion Group included portfolio managers and buy- and sell-side analysts with experience in a variety of industries. Further, the fifteen members of the Creditor Discussion Group included bankers from large and small institutions, debt security analysts, analysts from rating agencies, and an analyst involved in issuing performance bonds.

The Subcommittee met with the Investor Discussion Group on four occasions from October 1992 to March 1993 and the Creditor Discussion Group on three occasions from December 1992 to March 1993. Also, in April 1993, the Subcommittee met once with a separate group of both investors and creditors to discuss value information. Each meeting lasted four hours.

The Subcommittee followed the same format for each meeting with the investors and creditors. Premeeting materials identified questions to be discussed and alternative responses to those questions. At the meetings, participants discussed their views on the questions and the reasons for those views. Following each meeting, the staff prepared transcripts and meeting summaries. Further, participants completed questionnaires that followed up in more depth on points raised during the meetings. The Subcommittee's database includes both the transcripts and responses to the questionnaires.

Meetings with the Financial Accounting Policies Committee of the Association of Investment Management and Research and the Accounting Policies Committee of the Robert Morris Associates

The Committee met with two trade organizations that represent significant numbers of investors and creditors: (1) the Financial Accounting Policies Committee of the Association of Investment Management and Research (AIMR), representing portfolio managers and analysts, and (2) the Accounting Policies Committee of the Robert Morris Associates (RMA), representing bankers.

The Subcommittee met with those organizations to (1) determine whether their views are representative of the views of a wide range of the organizations' memberships, (2) identify additional direct documents for the Subcommittee's study and analysis, and (3) provide a vehicle for the Subcommittee to meet other investors and creditors for additional follow-up and in-depth discussions.

At the time of the meeting, the AIMR was in the process of developing a position paper summarizing its views related to external financial reporting titled Financial Reporting in the 1990's and Beyond. The AIMR has since circulated the paper for comments from its members. Major portions of the paper are included in the Subcommittee's database. The meeting with AIMR also identified several more direct documents for the Subcommittee's consideration, including the Annual Reports of the AIMR's Corporate Information Committee, portions of which are also in the database. Finally, the meeting resulted in a number of contacts with investors that proved helpful later in identifying people to serve on the Subcommittee's Investor Discussion Group.

The RMA and the Subcommittee discussed several technical matters that resulted in a subsequent exchange of correspondence, portions of which are included in the Subcommittee's database. Apart from that correspondence, the meeting with RMA identified no additional direct documents for the Subcommittee's consideration. However, the meeting resulted in a number of contacts with creditors that proved helpful later in identifying people to serve on the Subcommittee's Creditors Discussion Group.

Meetings with Other Investors and Creditors

Subcommittee members and staff also met on an informal basis with certain analysts. Specifically, several members and staff spent a day interviewing and observing sell-side analysts at two large brokerage and investment banking firms. Members and staff also met individually with a buy- side analyst from an investment management firm and a sell- side analyst who is well known in the European Community. Each of those meetings resulted in materials that summarized key points of the discussion. Portions of those materials are included in the Subcommittee's database.

Research about the Types of Information Included in Analysts' Formal Reports about Companies

The subcommittee concluded that a study of analysts' reports would help identify the types of information that analysts find useful. As a result, the Subcommittee sponsored research about the types of information included in analysts' formal reports about companies.

The research was performed by a team of academics. The team analyzed hundreds of sell-side analysts reports that are included on an automated database, and they summarized their conclusions in their report, "A Content Analysis of Sell- Side Financial Analyst Company Reports," dated December 1992. Major portions of that report are included in the Subcommittee's database.

Projects not Undertaken

The Subcommittee believes that the research resulting from the five types of activities discussed above provides a reasonable basis for its conclusions about the information needs of investors and creditors. Thus, the Committee can rely on those conclusions in developing recommendations to improve external reporting.

However, the Subcommittee's study of the information needs of investors and creditors is by no means comprehensive. The Subcommittee's conclusions are in some areas incomplete. Further, in many areas the reliability of the Subcommittee's conclusions could be significantly improved with additional work to confirm those conclusions. Finally, as noted in the analysis, some of the research resulted in inconsistent views from users. Further work in those areas could reduce those inconsistencies.

The Subcommittee believes that further research related to users' needs for information could provide critical information to those who are charged with maintaining the relevance of external reporting. The Subcommittee did not undertake additional research because of practical constraints on time and resources available to the Subcommittee, and not because it was unhelpful. The following examples illustrate the types of additional research that the Subcommittee believes would provide useful information:

1. Study of the types of information that companies voluntarily supply to investors and creditors that are not currently part of mandated external reporting. (The Subcommittee sponsored research in this area. However, because of delays in getting data from participating companies, the results of the research are not yet available.)

2. Research about the information needs of investors and creditors related to not-for-profit organizations and governmental entities.

3. Study of the types of information that companies provide to investors and creditors when seeking capital at critical stages, such as initial start-up, initial public offerings, responding to a hostile tender offer, major business combinations and reorganizations, and bankruptcy.

4. Statistically valid surveys of investors and creditors to gather or confirm findings about their needs for information.

5. Fieldtesting with investors and creditors the Committee's recommendations to improve external reporting.

6. Study of literature from non-U.S. authors related to the information needs of investors and creditors.

7. Study and summary of empirical evidence about the correlation between external reporting and the cost of capital.

8. Study and summary of empirical evidence about the correlation between types of information in external reporting and the quality of decisions by investors and creditors.

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