EFFECT OF REGULATION ON STATEMENT DISCLOSURES IN THE 1915 MOODY'S MANUALS, THE

Accounting Historians Journal, The, Jun 2005 by Archambault, Jeffrey J, Archambault, Marie

Abstract: United States firms in the early 20th century were subject to public and private regulation. Forms of regulation included rate regulation and stock exchange listing requirements. These regulations created incentives to report income statement information. This study utilizes the 1915 Moody's Analyses of Investments to test whether regulated firms in the United States reported more income statement information than unregulated firms. Rate regulation influenced utilities to report income statements more frequently than industrial companies. Stock market listing requirements also influenced the reporting of income statements. Therefore, the results indicate that both ' public and private regulations influenced financial reporting in the early 20th century. Another finding of the study is that income statements were more frequently reported than balance sheets for both ' railroads and utilities.

INTRODUCTION

The importance of income statement versus balance sheet information has increased over time. A major shift from the balance sheet to the income statement occurred during the 20th century as the income statement began to be used to assess the ability of a firm to generate wealth [Buckmaster and Jones, 1997; Jones and Aiken, 1994]. The need for financial reporting may be better understood by investigating the causes of this shift in emphasis.

In the late 19th and early 20th centuries, the balance sheet was dominant because it provided information on the stewardship function of management and information about capital [Oilman, 1939]. These were important issues for early investors in stocks. They wanted a secure investment. Banks also sought information on collateral for loans [Corcell, 1989]. As the financing needs of corporations grew and reliance on equity issues for capital increased, the income statement grew in importance.

Competitive factors were significant in limiting operating and profit information. Profitable industries did not want to attract competitors or cause labor to demand higher wages [Michael, 1996]. Few details about income components were reported [Lee, 1979; Morris, 1984; Baldwin et al, 1992]. The 'British Secretive Model' with minimal disclosure and a balance sheet focus has been used to describe reporting at the turn of the 20th century in the United States [Michael, 1996].

In the 1870s, the public and other businesses were unhappy about what was perceived as excessively high fares by U. S. railroads [Ulen, 1980; Trebing, 1984], The debate that grew out of these concerns resulted in railroad and utility regulation. The 1890s also saw the growth of individuals investing in stocks and the rise of organized U. S. stock exchanges to facilitate these investments [Navin and Sears, 1955; Bryer, 1993]. These exchanges then reacted to investor information needs and created listing requirements to regulate the information that listed companies had to provide investors [Sivakumar and Waymire, 1993; Normand and Wootton, 2001; Gross, 2002]. U.S. legislation was also passed to regulate the disclosures of listed companies [Previts and Bricker, 1994].

This paper examines the role that these forms of public and private regulation in the United States had on the amount and content of income statement and balance sheet disclosure for railroad, utility, and industrial companies. The study empirically tests whether these regulated industries provided more frequent income statements and greater amounts of income statement disclosures, looking at rate regulation and stock market listing requirements as separate types of regulation. The disclosure of revenue by rate-regulated industries is also examined. The paper examines whether regulation created pressure to disclose more income statement information. The current accounting history literature indicates that the income statement was not a prominent nor consistently provided statement in the U.S. until the 1920s. This study will add to the debate about when the income statement became prominent and the factors that influenced its rise to prominence and usefulness. Therefore, the role that regulation played in the shifting focus from the balance sheet to the income statement orientation is examined.

United States company reports in the 1915 Moody's Analyses of Investments are used to determine if income statements were more commonly provided and/or were more detailed for regulated versus unregulated companies. Moody [1915] reported the information that was made public by companies followed by his investment service. This public information was used to rate the bonds and stocks of companies for investment quality. Moody's reported on a large number of firms. The company reports are examined in this paper to determine whether an income statement and balance sheet were provided. Statistical tests are utilized to verify relationships. Large samples also enhance generalizability of the results. This empirical approach extends the literature base by using another methodology to examine the issue of the importance and prominence of income reporting. Different methodological approaches which find similar results make those conclusions more credible. Conversely, the use of alternative methodologies can often lead to different conclusions.