Discussion of “Board interlocks and the diffusion of disclosure policy”

Cai et al. (Rev Account Stud, forthcoming, 2014) find that firms with interlocked directors are more likely to stop quarterly forecasts and that the past stopping experience of interlocked directors affects the forecast-cessation process. Their findings are consistent with the notion that interlocked directors serve as conduits for information sharing, which may result in the change of corporate disclosure policies. My discussion focuses on potential issues with the findings and implications for future study.     

Discussion of “inventory policy, accruals quality and information risk”

Krishnan et al. (Review of Accouting Studies, 2008) investigate how the choice of LIFO versus FIFO affects firms’ accruals quality and cost of capital. The authors show that LIFO firms have better accruals quality and lower cost of capital than FIFO firms and that the cost of capital effect associated with the inventory valuation method is not subsumed by differences either in fundamental risk or accruals quality between LIFO and FIFO firms. This discussion is focused on key design choices and underlying assumptions.     

How financial information disclosure affects risk perception. Evidence from Italian investors’ behaviour

This paper investigates how different representations of financial information may be appraised in terms of complexity and usefulness, and how financial disclosure influences individuals’ risk perception. By using a consumer testing analytical approach, we run a survey on a sample of Italian investors: 254 bank customers were submitted 4 different templates, each combining a different typology of data (historical and prospective) and framing (words, numbers and charts) to indicate the same level of risk and return of four real-life financial instruments. Representation formats partially overlap with those mandated by regulators and used within the financial industry. Results show that the perceived riskiness of financial products is affected by the way information is disclosed. Perceived complexity of the financial information disclosure intensifies perception of riskiness of the product solicited. Gender, age, personal traits, behavioural biases and financial knowledge, do also play a role. Overall, given investors’ heterogeneity and behavioural biases, neither simplifying disclosure nor a ‘one-size-fits-all’ approach may be sufficient to ensure correct risk perception and to prevent unbiased investment choices.     

Does the mandatory disclosure of audit information affect analysts' information acquisition?

This paper explores the effect of public information on analysts' information acquisition. By introducing the implementation of the Key Audit Matters (KAM) Disclosure Standards for China's firms cross-listed in Hong Kong in 2017, we present evidence that KAM disclosure reduces analysts' firm visits, which is an important channel of information acquisition. The effect is particularly pronounced for firms with audit partner rotation and low institutional ownership. KAM disclosure by industrial leaders has a spillover effect on analyst visits for peer firms. Disclosure also improves the frequency and quality of analysts' forecasts and firms' information environments, indicating that KAMs are informative and audit information is an important determinant of analysts' information acquisition. Our study reveals the real effect of KAM disclosure on analyst decisions, which may be of interest to regulators concerned with the mandatory disclosure of audit information and capital market efficiency.     

Why Muddy the Water? Short selling and the disclosure of proprietary information

The conventional wisdom of voluntary disclosure literature is that the major factor preventing firms from disclosing customer-related information is firms' concern for proprietary costs. However, non-disclosure may also happen when firms have bad news to hide and are concerned about short sellers using customer information to verify bad news about the firms. By implementing a difference-in-differences research design against the backdrop of the deregulation of short selling in China, we find that increased short-selling pressure discourages firms from disclosing the identities of major customers. The findings also reveal consistent evidence supporting the bad news hoarding hypothesis rather than the proprietary cost hypothesis. Overall, our study provides an alternative explanation for firms’ lack of disclosure of customer information.     

Discussion of “The impact of product market competition on the quantity and quality of voluntary disclosures”

Li (2010, this issue) examines how product market competition affects voluntary disclosure by firms. Using several competition proxies, she finds that both the competitive threat from potential entrants into an industry and from existing rivals affect the quantity and accuracy of voluntary profit and investment forecasts by firms in that industry. However, the study’s findings are inconclusive mainly because each competition proxy used can reflect both types of competitive threat. The focus of my discussion is to provide some comments and suggestions for future researchers to consider in examining how the nature of product market competition affects voluntary firm disclosure.     

Do bond rating changes affect the information asymmetry of stock trading?

Using a sample of 279 upgrades and 310 downgrades from 1996 to 2004, we find that bond rating changes affect the information asymmetry of stock trading and other measures of information risk. Specifically, when a firm's bond rating is upgraded, its stock information asymmetry and its analysts' earnings forecast dispersion are significantly reduced, while the institutional equity holdings of its shares are significantly increased. The reverse is true for a downgrade. In addition, the degree of change in stock information asymmetry is positively associated with the magnitude of the bond rating changes.     

How does ownership concentration exacerbate information asymmetry among equity investors?

This study investigates the association between ownership concentration and information asymmetry between informed and uninformed investors, and explores several mechanisms that mitigate such a relation. Using a large sample of Korean firms whose ownership structure is highly concentrated, we find that the degree of information asymmetry increases with ownership concentration. We also find that ownership concentration is positively associated with information asymmetry via an increase in the relative amount of informed trading. This effect more than overcomes the unexpected decrease in the frequency of private information events. Furthermore, while neither institutional investors nor internal corporate governance systems help alleviate the negative effects of ownership concentration, analyst following reduces the information asymmetry associated with ownership concentration. Our findings are robust to endogeneity concerns, additional control variables, and an alternative use of empirical proxies.     

Do accruals exacerbate information asymmetry in the market?

A considerable body of evidence, both archival and experimental, suggests that accounting accruals are heterogeneously interpreted by investors. We examine whether the information asymmetry among investors arising from this heterogeneous interpretation, implied in these empirical results, affects transactions costs in the form of the adverse selection component of the bid-ask spread. We examine this impact both, in a yearly setting and around the first release of quarterly accrual information. The results of the study provide empirical evidence of a positive association between the adverse selection component and accruals in the yearly analysis. Since wider bid-ask spreads are both theoretically and empirically linked to higher stock returns (Brennan & Subrahmanyam, 1996), our results provide a transaction cost basis for understanding one possible factor underlying the linkage between accruals and cost of equity capital, and accruals and information risk pricing as documented in Francis et al. (2005) and Ecker et al. (2006).     

Did SFAS 166/167 decrease the information asymmetry of securitizing banks?

Beginning in 2010, mandated Financial Accounting Standards No. 166 and 167 (SFAS 166/167) changed the consolidation rules of securitization entities and required more information about their securitization activities. I find that securitizing banks experienced a decrease in information asymmetry from the pre- to the post-SFAS 166/167 periods, and that more visible securitizing banks are less sensitive to SFAS 166/167. These inferences are robust to a number of sensitivity analyses. This study is one of the first to provide evidence of the effects of SFAS 166/167 on the information asymmetry of securitizing banks.     

Discussion of “Earnings Management and the RevelationPrinciple”

Review of Accounting Studies -     

Discussion of “Using accounting information for consumption planning and equity valuation”

This paper discusses Yee (2007), who investigates the role of accounting information for consumption planning and equity valuation. Higher earnings quality increases investor welfare and ex ante stock prices as well as the weight on earnings in valuation equations based on both cash flows and earnings. The former is due to improved consumption smoothing through more informed production choices, while the latter is due to the impact on the relative information content of current cash flows versus earnings about future cash flows.     

Voluntary disclosure of financial information by French firms: Does the introduction of IFRS matter?

This paper addresses the relationship between mandatory and voluntary information. The introduction of IFRS in 2005 modified mandatory information requirements and influenced the content and level of the discretionary information disclosed by firms. This background allows us to test whether the complementary or substitution hypothesis dominates. A French firm data panel is used to empirically analyze the consequence of IFRS introduction. Referring to the 2003–2008 period gives a long-term perspective and allows us to identify discretionary communication policies by building a proprietary voluntary disclosure score. We find that voluntary disclosure policies experienced an upward swing with the introduction of IFRS, giving support to the complementary hypothesis. We also demonstrate a dynamic relationship between disclosure and the dispersion of analysts' earnings forecasts. The practical implication of the paper is to show that firms' discretionary communication policies follow both a long-term and a short-term component to meet analysts' demands for information. Our contribution is to refer to a long-term sample in one country where the environment and regulation context is homogenous. Our disclosure score index seems to be a good measure to outline that idiosyncratic communication policies are complex and strategic.     

Discussion of “How well do investors understand loss persistence?”

Li (Rev Acc Stud, 2011) proposes a quarterly earnings prediction model for loss generating firms, shows that it produces better specified future earnings estimates relative to naïve quarterly forecast models, and that it can be used to form a trading strategy that produces economically significant annual hedge returns. I discuss alternative perspectives on Li’s empirical results and suggest directions for future research.     

What is the economic value of the Extractive Industries Transparency Initiative (EITI) information disclosure?

We use the United States Extractive Industries Transparency Initiative (EITI) unilateral release of information on non-tax payments by extractive companies to the US Government as an illustration of the economic value of EITI information. We test for market reaction to the initial disclosure of this information in terms of change in trading volume and abnormal returns, and the value relevance of the continuing disclosure of the information over 2013–2016 period. The results show that the initial release resulted in a significant trading volume reaction and produced positive cumulative abnormal return in the period immediately surrounding the release date. Regression analyses of the cross-sectional variation in abnormal returns show that the reaction is associated with oil and gas firms with high working capital and lower asset turnover. Furthermore, we find that the USEITI information released over the period to 2016 is (at least) weakly value relevant.     

Does the disclosure of internal control deficiency matter for accrual quality? Evidence from China

Using a sample of Chinese listed firms that are required to audit and disclose any internal control deficiency (ICD), this paper examines the effect of mandatory ICD disclosure on accrual quality (AQ) in China. We find that relative to voluntary ICD disclosure, mandatory ICD disclosure is associated with poorer AQ, as proxied by abnormal accruals, suggesting that the mandated disclosure of ICD effectively identifies financial reporting quality in Chinese firms. This relationship is enhanced by government control of firms (especially the central government) and by the intensity of government inspections and is stronger in undeveloped regional markets. The results are robust to the application of the PSM-DID method and use of different measures and samples. Our findings demonstrate the critical role of the mandated disclosure of ICD and improve our understanding of internal control mechanisms in emerging markets.     

Discussion of “intangible investment and the importance of firm-specific factors in the determination of earnings”

Brown and Kimbrough (Review of Accounting Studies, 2011, this issue) examine the effect of intangible assets on the “uniqueness” of a firm’s earnings. The paper represents an important link between the strategy literature on firm organization and the accounting literature on the drivers of firm performance. This discussion reviews the relevant strategy literature and its link to the accounting literature, discusses various aspects of Brown and Kimbrough, and explores implications of Brown and Kimbrough’s findings.