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Investor Perception and Financial Reports

and usefulness of information disclosed in the financial reports of companies listed on the Islamabad Stock Exchange (ISE). Further to find out the extent of impact of investor’s self efficacy on the investor’s perception. A survey methodology was employed involving a selected sample of the variables. Data was collected both manually and electronically. The study was designed to test the hypotheses which were developed to find out the strength of relationship among information disclosure, investor’s self efficacy and investor’s perception. The first two were independent variables and the last one was dependent variable. This study was done to the investors while of assessing financial information of companies and take investment decisions.


The new business environment is ever changing and needs lot of expertise to compete effectively. Due to vast development of the capital markets, investors’ are now giving a great concern to the credibility of the companies in which they are investing. Information disclosure is considered as an indispensable phenomenon for the effectual functioning of securities markets. Due to improper allocation of the resources in the market, the need for added capital values on part of funds provider has increased, in order to attract enough capital for operations and to generate huge profits. Information is considered as a communication bridge between all efficient market associates. Information disclosure gains significant to maintain asymmetry between the investors and management, once they have made a deal (Freedman & Stagliano, 2002). To evaluate the nexus among accounting data, relevant information and investor’s perception is considered as the prime objective of the capital market study. The inconsistency in stock prices and volume of security trades derives the information content of accounting numbers, within a short time span when these are published. However, there is no significant evidence on the impact of information disclosure on investor’s decision in Pakistan. Schrand & Elliott (1998) highlighted the fact that the focus of study of most researches was to find the effects of risk; hence they provide little guidance on how investors assess risk and which disclosures can help investors in determining risk. In order to bring pricing efficiency and market confidence the availability, usefulness and adequacy of the relevant information is highly significant. Complete relevant information is considered indispensable for investors to make sound judgments of the value of securities. El-Erian & Kumar (1995) and Mobarek & Keasey (2000) stated that the fragmentation of capital markets, political and economic instabilities can hinder the efficiency of capital markets. Some other factors like deficiency of corporate information, the lack of auditing experience, and the flaws of regulations and disclosure requirements lead to curtailed vital information. Cassar & Friedman (2009) depicted in their study that self efficacy also has a nexus with the investor’s decision while perceiving risks of the stocks. Self-efficacy describes a person’s self-confidence in his/her ability to accomplish tasks. Self-efficacy has been shown to influence a wide range of individual’s behavior. Self efficacy self-efficacy is associated with increased expectations and goals (Bandura, 2001), impacting investment decision (Cassar & Friedman, 2009), better academic performance (Luszczynska, Gutiérrez-Doña, & Schwarzer, 2005) improved work-related performance (Stajkovic & Luthans, 1998), greater job search activity (Eden & Aviram, 1993), and health-related choices (e.g. Clark & Dodge, 1999; McAuley, Courneya, Rudolph, & Lox, 1994; Wulfert & Wan, 1993). Self-efficacy can be either task-specific, relate to many related tasks within a domain, or be generalized. The focus in this study is on investor’s self efficacy, which depicts the confidence one has in his/her ability to make sound investment decisions either doing it on entrepreneur basis or on individual basis and to trace out the significance of self efficacy in relevance to the judgment of investor’s perception. The main objective of this study is to find out the how information disclosure and investor’s self efficacy affect investor’s perception while investing in stocks and taking decisions pertaining to investment in Pakistan.

Literature Review

Investor’s Perception

Germon & Meek (2001) believe that accounting exists because it satisfies a need – primarily a need for information. In order to be relevant accounting data must among others, be quick to respond to users’ (particularly the investors) needs. Generally, investors are not in a situation to directly assess the performance of companies in which they intend to invest. They usually depend on financial reports prepared by the management of such organizations. Financial report is one of the best sources of accounting information about a company. Financial reporting is an essential part of disclosure and helps investor to discover investment opportunities.

Studies on the usefulness of interim reporting for investors are limited compared to those of annual reporting. A number of evidence on the usefulness of interim reporting could be gathered from annual report studies. Cerf (1961) provided evidence on the usefulness of interim reporting in the US. In his study on the major sources of financial information used by 215 analysts, Cerf (1961) found that analysts named the interim report as one of the main sources of information, alongside with the annual reports, direct contact with management, and brokers’ studies of corporations and industries.

In Malaysia, at least two studies, that is, Izah & Zuaini (1995) and Rahman (1998) provided evidence on the use of interim reports by investors. Izah & Zuaini (1995) showed that interim reports were, on average, rated third by the financial analysts in making investment decisions, after the annual reports and contacts with the management of a company. Rahman (1998) provided evidence that financial analysts, on average, rated interim reports as the third most important source of information after visits to companies and prospectuses. The annual reports were rated sixth most important source of information by the analysts. Quarterly financial reports were used by professional investors but their usefulness varies across types of investors: scanners, trackers, and sophisticates. Different groups of investors perceived usefulness based on their respective needs, Although investors regard quarterly reports as the sixth most useful source of information, usefulness of quarterly reporting remains significant.

Annual reports appear to be more useful than quarterly reporting despite the fact that the latter is timely. One explanation is that quarterly reports are not audited thus perceived to be less reliable and susceptible to income manipulation. Another reason is that investors may take some time to familiarize themselves with the nature and role of quarterly reporting, as they have just shifted from half-yearly reporting (Ismail & Roy, 2005).

Abdelkarim, Shahin & Arqawi, (2009) have contributed a lot in assessing the investor perception. They articulate that external users attached a higher level of importance to the profit and loss statement, balance sheet, and cash flow statement, statement of shareholders equity, management commentary, and footnotes to the financial statements. These results are consistent with the results of previous studies, especially in the Arab region.

According to the quality of information, all users consider the timeliness and availability of information as important. They also considered other quality items such as adequacy, credibility, relevancy, and understandability important for their investment decisions. Information users evaluated the company’s level of disclosure as poor and weak (Abdelkarim, Shahin and Arqawi, 2009). These results reflect the inadequacy of the information quantity and quality that companies listed at the Palestine Stock Exchange usually disclose. Companies should comply with the minimum international disclosure requirements and timeliness of the disclosure process (Abdelkarim, Shahin and Arqawi, 2009). Another important point to note is that investors considered information related to risk, and investment opportunity, as the most important of non-traditional financial information. Net income, share price growth, net cash flow, sales revenue amount, and amount of current liabilities were the most important items that user’s perceive. Finally, all investors deemed that more quantity and quality of items disclosed by listed companies could create fair stock price value. While examining the multi-user perceptions in a study suggest that investment user who holds finance and/or accounting qualification could perceive information differently from one with an engineering qualification (Abdelkarim, Shahin and Arqawi, 2009). The different user groups considered timeliness, availability, and credibility of relevant information as the most important features of corporate information. The users however, gave less importance to independent verification, as it is considered as contributing features to the usefulness of corporate information. A high degree of importance was attached to disclosure items such as earnings per share, investments opportunities, and performance. Despite of financial reports low quality, all information users do find information items disclosed in financial reports as useful for their investment decision-making process. In addition, the most important items were found in the profit and loss statement, balance sheet, and cash flow statement.

Investor’s Self Efficacy

Mavra & Bandura (1977) “Self-efficacy implies a conscious awareness of one’s ability to be effective, to control actions or outcomes.” Self-efficacy refers to a person’s belief that they can perform tasks and fulfills roles, and is directly related to expectations, goals and motivation (Bandura, 2001). Bandura postulated that an individual characterized by high self-efficacy concerning a specific behavior, would be highly confident in his or her capability to successfully perform the task hence would most likely decide to pursue it, expand effort and pursue the task even while facing difficulties. Investor’s self efficacy is stated as the belief of investor in his own decision making, confidence while making investment even in difficult scenarios (Bandura, 1986). Cassar & Friedman (2009) depicted in their study that self efficacy also has a nexus with the investor’s decision while perceiving risks of the stocks. Indeed, research on self-efficacy in various contexts has indicated that efficacy beliefs affect performance levels through their influence on ambitious goal setting, efficiency in dealing with problems, investment of effort and persistence (Wood & Bandura, 1990; Bandura, 1997). Self-efficacy has been shown to affect a wide range of choices, including work-related performance (Stajkovic & Luthans, 1998), small business growth (Baum & Locke, 2004; Baum, Locke, & Smith, 2001), job search activity (Eden & Aviram, 1993), academic performance (Hackett & Betz, 1989; Luszczynska et al., 2005), choice of academic major (Hackett, 1985), and career choice (Lent & Hackett, 1987). A vital facet of self-efficacy is its level of specificity. Self-efficacy can be completely general at the broadest level (Shearer, Maddux, Mercandante, Prentice-Dunn, Jacobs, & Rogers, 1982), referring to confidence about any and all tasks. Whereas, it refers to beliefs about one’s confidence in completing one specific task successfully, at the narrowest level. Also most scholars today distinguish between two types of self-efficacy: ‘general self efficacy’ and ‘specific self-efficacy’ (Shearer, 1981). The former relates to a general belief in one’s overall abilities across different situations, and the latter relates to a domain-specific belief in one’s ability in a specific area. Entrepreneurial self-efficacy (ESE) describes a person’s confidence about their ability to perform the various tasks and roles relevant to entrepreneurship and related decisions. The use of ESE, rather than general self-efficacy is highly effective in this study, to explain entrepreneurial investment because domain-specific self-efficacy has been shown to have greater impact than general self-efficacy when describing investment choices (Betz & Hackett, 1983; Gist, 1987). ESE is not venture-specific; individual’s ESE should apply at all entrepreneurial activity regardless of distinctive factors related to each unique venture. More generally, ESE differs from locus of control because self-efficacy refers to beliefs about achievable levels of performance or behavior, while locus of control concerns beliefs about the achievements of outcomes in addition to performance levels (Rotter, 1966). Self-efficacy differs from self-esteem because self-esteem is an affective self-evaluation, such as ―I take a positive attitude towards myself (Rosenberg, 1965), whereas self-efficacy is a judgment about one’s capability to complete a task (Gist & Mitchell, 1992). Dispositional optimism connotes a generally positive outlook, not a judgment about one’s efficaciousness (Puri & Robinson, 2007). Core self-evaluation is a construct that encompasses locus of control, generalized self-efficacy, self-esteem and emotional stability (Judge & Bono, 2001). This broader construct, due to its abstractness, is not closely related to ESE, except that individuals with high core self-evaluation may be expected to have high ESE, as they would be more likely to have high domain-specific self-efficacy. Overconfidence has been defined as occurring when individuals overestimate the accuracy of their predictions or more generally when individuals hold excessive confidence in relation to abilities, knowledge, and beliefs (Hayward, Shepherd, & Griffin, 2006).

However, in this study the emphasis is on investor’s self efficacy, which depicts the confidence one has in his/her ability to make sound investment decisions either doing it on individual basis or on entrepreneur basis and to trace out the significance of self efficacy in pertaining to the judgment of investor’s perception.

Information Disclosure

The association between capital markets & accounting information has attracted considerable attention (Ball & Brown, 1968). The concentration for this subject is justifiable, given the objective of financial reporting that accounting figures are aimed at providing investors with useful information for their investment decisions. In capital markets, financial information is thought to assist the prediction of firms’ future cash flows and help investors assess future securities’ risk and returns. Al-Mubarak (1997) studies of the market reaction to the release of new accounting information that analyze the stock price impact of accounting disclosures in order to determine whether these are useful to market participants. Studies of the long-term association between stock returns and accounting numbers, which examine the extent to which the information conveyed by accounting figures is consistent with that reflected in stock prices. Complementary studies devoted to the use of accounting data by investors and to the influence of market considerations on accounting choices. The worthiness of financial reports is in the top research playgrounds nowadays. Some recent studies even report a decreasing trend in the value-relevance of financial statement information in the U.S. over the past decades (Francis & Schipper, 1999). Ball and Brown (1968), stated that present accounting literature has well documented the usefulness of accounting earnings, book value and other items in the financial reports. While most of these studies provide evidence that annual report is an important source of information, they also show a low association between accounting numbers and stock prices or returns [Graham and King (2000), Chen (2001)]. Many prior studies empirically establish the usefulness of financial reports or other financial information by the statistical association between the financial information and stock prices or returns. Hodge (2003) suggests that a survey-based research can complement the archival-based research in that it gathers data on a multitude of individual beliefs and practices to provide the underlying reasons for investors’ behavior. The disclosure of relevant corporate information is an essential element of a market-based monitoring of companies. Disclosure and transparency induce corporations to better protect investors, and thereby enhance investors’ confidence in capital markets. The characteristics of significant, timeliness, correctness and instructive should be present in a good disclosure. In relation to the reliability of disclosed information, companies must adopt internationally recognized accounting and auditing standards, and assure the independence of the audit process. Corporate disclosure has evolved from being solely focused on financial information excerpted predominantly from a firm’s financial statements. Richardson & Welker (2001) highlighted that corporate disclosure is utilized as a strategic tool in risk assessment and the value creation process, currently. The appearance of complete disclosure strategies that cover all aspects of a firm’s performance has resulted in the broadening of both the scope and scale of the information released by firms. Disclosure strategies, including economic, social and environmental information, are now a key component of many firms’ investor communication programs. This evolution in corporate practices appears to be well founded, since empirical findings suggest that an open disclosure policy provides many benefits to a firm, e.g., a lower cost of capital (Botosan and Harris, 2000). Environmental reporting typically occupies a prominent place within the scope of a firm’s disclosure strategy (Cormier and Magnan, 1999). In Jordan, Abu-Nassar & Rutherford (1996) undertook a study to discover the view of external users of annual corporate reports. They targeted different groups of external users, namely individual shareholders, institutional shareholders, bank loan officers, stockbrokers, and academics. They found out that bank loan officers were the heaviest users of the annual reports in Jordan, while individual shareholders and academics were found to be the least. They also found the income statement and balance sheet to be the most widely read parts of the annual corporate report by all users. In Saudi Arabia, Al-Mubarak (1997) confirms that the annual corporate report is the primary source of corporate information and his findings are in line with those found in developed countries. Abdelsalam (1990) reports that the vast majority of respondents indicate that investors read the annual reports and that the profit and loss statement was the most important part of the annual report. Al-Fayyoumi (2003) tested the informational efficiency by analyzing the relationship between trading volume and stock-price volatility. The results provided that investors in the PSE should pay more attention to the fundamental (financial) information in order to improve the rationality of the decision making process. Abdelkarim & Shahin (2007) and Abuzarour (2005) used the variance ratio test, developed by Lo and Mackinlay in 1988, and the nonparametric run test, to examine the PSE efficiency and the results provided further evidence that the PSE is weakly efficient. In the context of Palestine, market inefficiency and corporate governance were identified as the main reasons for PSE being a shallow market and the main obstacles for PSE capitalization growth (MAS 2004). Financial disclosure procedures are weak; there is low public awareness about securities, poor investment culture, and poor accounting and auditing procedures. All these factors have negatively affected the performance of the PSE in terms of depth, liquidity, volatility, and trading volume (Jafary & Makhool, 2004). While no significant research have been found in this context in the stock exchange and capital market of Pakistan. This identified a need to bridge the gap and to find out the association between these three variables in the scenario of Pakistan capital markets and stock exchanges.

Considering the above all mentioned literature, the conclusion can b made that there are no studies to investigate the investors’ perception towards information disclosure. Because little is known about the stock price behavior in this market, the aim of the study is to study is to find out the impact of financial information disclosure and investor’s self efficacy on the investor’s perception. This can be achieved by assessing the perception of users towards the availability, adequacy and usefulness of relevant information disclosed by companies listed at stock exchange in Pakistan. Moreover, the relationship between investor’s perception and self efficacy is assessed by ambitious goal setting, confident in performing tasks and pursuing tasks with facing difficulties.


A questionnaire survey was designed where respondents were asked to determine the degree of importance of each information item using two questionnaire forms. This survey was conducted both manually and electronically (through emails) to the participants. One questionnaire was measuring the dimensions of information disclosure. It consisted of Likert-type five scales, where (N+) referred to strongly disagree, and (Y+) to strongly agree, and tested statistically to fulfill the objectives of this research. An extensive review of relevant literature was undertaken in order to form a list of the information potentially used by financial statements’ users, e.g. Taylor (1965), Epstein & Pava (1993), Abu-Nassar & Rutherford (1996), Ba-owaidan, M. (1994), Bartlett & Chandler (1997), Mangena & Kinman (2003). Moreover, the dimensions of self efficacy were assessed through a 10-item’s questionnaire likert scale, in which options ranged from 1 to 4, 1 representing “not at all true” and 4 representing “exactly true”. The Islamabad Stock Exchange (ISE) was selected as a target location; the individual investors were assessed through these questionnaires form filled in a short span of time. The target groups were asked to indicate their opinion, using the designed scale, in order to achieve authentic results.


This study aims to assess the availability, adequacy, and the perceived usefulness of information for investment decisions. Moreover, the impact of investor’s self efficacy on investor’s perception through by ambitious goal setting, confident in performing tasks and pursuing tasks with facing difficulties. To smooth the progress of our analysis, the following hypotheses were developed and are tested:

Ho: Investor’s self efficacy has positive impact on investor’s perception,

H1: Investor’s self efficacy has no impact on investor’s perception,

H2: Information disclosure in financial reports has positive impact on investor’s perception

H3: Information disclosure in financial reports has no impact on investor’s perception

Details of the study

The purpose of this study was to test the designed hypothesis in order to find the above mentioned relationship by using statistical tools and running the collected data on SPSS software. This study measured the co relational impact of the independent variable on the dependent variable. Moreover, the study was done in the non-contrived type of setting in which the field study was done through questionnaire survey. Further this is cross sectional study being done to find out the behavior aspect of investors. The unit of analysis in this study was individuals who were filled the questionnaire about their respective behaviors. The level of interference of the researchers was minimal as it was done in non-contrived setting.

Model of the study

After reviewing the literature work in detail and analyzing the previous model of the study, a new model was proposed to fill the gap of the previous studies. This model was then designed to depict the aims of the study in a precise way. The model consists of two independent variables which are investor’s self efficacy & information disclosure and one dependent variable investor’s perception along-with their respective dimensions. The model attached here, vividly depicts the nexus of the variables and the purpose of the study. The final model is as follow:

Fig 1: Model of the study

Final Questionnaire

Questionnaire for Information Disclosure

Dear Respondents: Thank you for your willingness to join this survey. Please respond to all the questions in this questionnaire. We understand that the interpretation of the questionnaire and the

responding to the questionnaire require a high level of professional judgment. Please check (√) the appropriate parentheses or express the extent to which you agree or disagree on the given statement by choosing (circling) one of the following: (Y+) strongly agree, (Y) agree (O) neither agrees nor disagrees (or no opinion), (N) disagree; (N+) strongly disagree.

No. Question Mark (√)

General Information

Q 1 Kind of Information Users You Are

1 Individual investor

2 Institutional investor

3 Creditors; (Bank loan officers)

4 Stock brokers

5 Financial analysts

6 Academics

Q 2 Information Users by Qualification

1 PhD

2 Masters Degree

3 First degree

4 Professional qualifications

5 Other

Q 3 Information Users by Experience (Number of years)

1 Less than 1 year

2 1-5 Years

3 6-10 Years

4 Above 10 Years

Q 4 Information Users by Industry Focus

1 Telecommunications

2 Insurance companies

3 Banks

4 Investment Management Companies

5 Pharmaceuticals

6 Services

7 Industrial

Q5 Investors By Amount of Money Invested

1 Nothing

2 Less than 100,000

3 Between 100,000 – 249.999

4 Between 250,000 – 499,999

5 Between 500,000 – 999,999

6 More than 100,000

Investor’s Perception

Q6 Investors Goals






1 Safety of capital

2 Steady income

3 Speculative gains

4 Investment opportunity

Q7 Kind of Analysis usefulness to predict future stock value

1 Political analysis

2 Macroeconomic analysis

3 Technical analysis

4 Fundamental (Financial) analysis

5 Statistical analysis

6 No Analysis, Imitation other investors

Q 8 Users View towards various sources of information

1 PSE Market statistics

2 Corporate financial reports

3 Advice of investment services (Specialists)

4 Advice of stockbrokers

5 Direct information from the company

6 Investors own analysis

7 Market rumors, and adages

Q 9 Users Readership of the corporate reports

1 Balance sheet

2 Profit and loss statement

3 Cash flow statement

4 Footnotes to the financial statements

5 Statement of shareholders equity

6 Management commentary

7 Auditors report

Q 10 User’s evaluating of the of corporate disclosure quality

1 Timeliness

2 Availability of specific information

3 Understandability

4 Credibility

5 Easy access to sources of information

6 independent verification

Information Disclosure

Q 11 Level of disclosure by companies






1 In Management Commentary Section

2 In Income Statement section

3 In Balance Sheet Section

4 In Cash Flow Statement Section

5 In Segmental Information Section

6 In Accounting Policies and Notes

Q 12 Users view about usefulness of information

1 Provide primary information to investors to help them in making investment decisions

2 Provide information to help investors to monitor their investment

3 To predict expected income and earnings per share

4 To help investors in assessing liquidity of the company

5 To predict future dividend of the company

6 To evaluate company’s performance over time

7 To make comparison between companies performance

Q 13 Importance of Non Traditional Information

1 Information Related to Risk

2 Business opportunity

3 Social Responsibility Information

4 Market regulation

Q 14 Importance of Non Financial Information

1 Execution of Corporate Strategy

2 Corporate product or service Creation

3 Kind of management, especially directors

4 Customer Satisfaction

5 Indication of employee morale and Satisfaction

6 Quality of Processes

7 Environmental & Social Policies

8 Industrial sector Sustainability

9 Organizational and functional structure

10 Corporate governance

11 Company profile

12 Competitor Position

13 Quality of Published Materials

14 Voluntary disclosure

15 Disclosure by the website

Usefulness of Financial Reports

Q 15 Usefulness of Financial Reports, Items

1 Net cash flow

2 Gross and disaggregated value of current liabilities

3 Gross and disaggregated amount of shareholders equity

4 Capital structure

5 Share price growth

6 Strategies of Profit

7 Current research and development expenditure

8 Sales revenue amount

9 Dividend per share for the period

10 Sales growth expected

11 Gross and disaggregated value of current assets

12 Discussion of results with reasons for changes

13 Number and amount of authorized and issued shares

14 Overall financing costs

15 Net assets book value

16 Money resources and uses

17 Description of the company main product or services

18 Inventories value and method used to determine the cost of (e.g. LIFO, FIFO)

19 Working capital Expenditure last five year

20 Discussion of Increase or decrease of Expenditure

21 Discussion of Increase or decrease of revenues

22 Expenditure on advertising and publicity for the past years

23 Discussion of financial strength of the company

24 Breakdown of borrowings (e.g. lending institution, date of maturity, security)

25 Information relating to investments (e.g. names, percentage, ownership)

26 Summary of net sales for at least the most recent five years

27 Current market value of quoted investments

28 Revenue recognition method

29 Future economic outlook of the company

30 Breakdown of sales revenue by major product line, class of customer and geographical location

31 Expenditure on human resources (e.g. training, welfare facilities)

32 Basis of accounting methods used, and any change

33 Discussion of the major factors likely influence following year’s results

34 Analysis of sales revenue and earnings attributable to foreign operations

35 Information relating to subsidiaries (e.g. names, addresses, percentage ownership)

36 Forecast of following year’s profits

37 Number and type of ordinary shareholders (e.g. institutions, individuals)

38 Information relating to past five balance sheet events

39 Net income

40 Total public and management expenditure

Questionnaire for Self Efficacy

Self efficacy represents how much you are aware of your

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