Terri Yohn argues that more disaggregation is not better.
“Why go through all the accounting gymnastics, if its not going to help you forecast better?” she asked faculty and Ph.D. students in a lecture at the Tippie College of Business in September. Yohn is a professor at Emory University and pioneering accounting researcher.
“In financial statement analysis research, what we want to know is how we can use accounting information to provide better forecasts of return on equity (ROE) because t hat’s the driver of firm value,” Yohn said.
Yohn was on campus as the 2021 Sullivan Scholar in Residence. Each year, the college invites an eminent scholar in the field to spend a week at Iowa, meeting with students and faculty. After a pandemic hiatus in 2020, students and faculty were grateful for the opportunity to network and discuss the latest research trends and possible collaborations with Yohn, an expert in financial statement analysis. The program is generously funded by Iowa accounting alumnus Michael Sullivan
According to Yohn, her research is borne out of a desire to help her students.
Textbooks talk about the Dupont analysis and disaggregated financial statements, and you assume because all the items are there, they’re important. But I found there was very little empirical evidence. I wanted students to understand why certain items might be more—or less—informative on a financial statement.”
"If you look at every line item, not only is it not an improvement, but it results in significantly worse forecasts of future ROE." -Yohn
Her continual questioning and fact checking has resulted in a very successful research career. Her research documents that while breaking out operating income, taxes, and some special items significantly improves ROE forecasting, if you look at every line item, not only is it not an improvement, but it results in significantly worse forecasts of future ROE.
Yohn’s research also crosses over into behavioral finance, looking at how financial statement information and investor sentiment can be used to forecast profitability.
“Big investing houses and hedge funds have been using accounting signals for some time,” Accounting Department Executive Officer Cristi Gleason said in an interview after the lecture. “And it’s because of research that Yohn and other academics are conducting.”
“I’ve followed Yohn’s work for years,” Professor Jon Garfinkel said. “She connects the dots across multiple disciplines and is always exploring questions that key decision-makers—like regulators, investors, firms, and, of course, accountants—care about. She takes the next step when a result is surprising, recognizing that it opens the door to new questions.”