The Information Content of Accounting Reports: An Information Theory Perspective

Is it possible to quantify the information content of accounting reports? If possible, then how? This study examines accounting as a classical communication system with the purpose of providing a framework with which to approach these fundamentally important questions. Information theory was established in the early-mid 20th century to describe the properties of classical communication systems. Applying concepts from this theory to an accounting context provides insight into the questions asked above. Specifically, a measure of the information content of financial statement numbers is developed from these information theory concepts. The measure is also applied to several large companies’ earnings numbers and aids in predicting their price movements.