Narrative disclosure quality and the timeliness of goodwill impairments

This paper studies the relation between the quality of corporate narrative disclosure and the timeliness of goodwill impairments. We combine five measures of the linguistic content of annual report narratives to generate a proxy for narrative disclosure quality. To measure the timeliness of impairments, we deploy a model that relates observed goodwill impairments to the main determinants of impairments identified by prior literature, focusing especially on current period negative stock returns. We hypothesise and find that the impairments of firms with low-quality narrative disclosures are less timely than the impairments of firms with high-quality disclosures. In addition, using a signalling argument, we hypothesise, and find that the market response to goodwill impairments is more negative for firms with low disclosure quality.     

Goodwill and Mandatory Disclosure Compliance: A Critical Review of the Literature

The aim of this paper is to critically analyse the literature published from 2002 to mid‐2015 on disclosures of goodwill and their respective impairment tests; identify the main contributions of the literature, as well as its limitations; and suggest new approaches for future research. We also present a summary of the main determinants of disclosures on goodwill in the literature as well as the still scarce studies’ conclusions of those disclosures in the market. After a review of the literature, we discuss the need to reinforce enforcement mechanisms, so as to improve the level of compliance of disclosures on goodwill and their impairment tests. The majority of the analysed literature reveals that the information disclosed about goodwill is incomplete and largely heterogeneous, indicating a reduced level of compliance with the disclosures required by accounting standards. The paper may support the development of future empirical studies about goodwill's disclosures, which will bridge the identified gaps in the literature.     

Does writing down goodwill imperil a CEO’s job?

We find that accounting charges for goodwill impairment, which imply a deterioration in the capabilities of acquired assets to generate expected cash flows, provide useful indicators of CEO underperformance. The results show that the size and presence of a goodwill impairment charge are positively associated with forced, but not voluntary, CEO turnovers. This implies that goodwill impairment provides information before CEO changes occur. We also find that goodwill impairment has incremental power to predict forced turnover when it is unexpected based on book value relative to market value of equity and when it runs counter to overall firm performance. The association between goodwill impairment and forced CEO turnover varies with audit quality, consistent with the importance of the perceived reliability of accounting information for its effect on CEO retention decisions. Given that the FASB recently considered eliminating annual goodwill impairment testing (FASB, 2022) whereas the IASB not only prefers impairment testing but is considering requiring additional related disclosures (IASB, 2020), our evidence on the informativeness of goodwill impairment charges is timely.     

Disclosure of fair value measurement in goodwill impairment test and audit fees

Recent increases in the occurrence and magnitude of goodwill impairment charges highlight the increasing importance of the role of the auditor in goodwill accounting. This study examines the association between disclosures about the fair value measurement of goodwill and audit fees. We find that goodwill-related disclosures are positively related to audit fees, consistent with the idea that auditors increase their audit efforts to mitigate potential reputational and litigation losses (“audit risk effect”). Additionally, our results indicate that the information asymmetry and investor scrutiny moderate the association between goodwill-related disclosures and audit fees. One possible explanation is that auditors take goodwill-related disclosures as a signal of truthful goodwill accounting and this “signaling effect” partially offsets the “audit risk effect” of goodwill-related disclosures when information asymmetry or investor scrutiny is perceived as high.     

Voluntary disclosure,mandatory disclosure and the cost of capital

We examine the association between a firm's cost of capital and its voluntary and mandatory disclosures. We include two types of mandatory disclosure: those that are a function of periodic reports that are realizations of ex‐ante reporting systems and those that arise due to specific corporate events. To capture a firm's voluntary and event‐driven mandatory disclosures, we use information the firm provides via 8K filings. To capture periodic mandatory disclosures, we use earnings quality measures derived from the literature. Consistent with endogenous relations predicted by theory, we find that voluntary disclosure and both types of mandatory disclosure are correlated, although only event‐driven mandatory disclosures are significant in models that explain voluntary disclosure. We also find that the cost of capital is generally influenced by each of these disclosure types. We also find that controlling for periodic mandatory disclosure does not affect the relationship between voluntary disclosure and the cost of capital, while controlling for event‐driven mandatory disclosure sometimes affects the relationship depending on the measures used. Our study suggests that a firm's disclosure environment includes the three types of disclosure examined, although the inclusion of mandatory disclosures does not affect the measured association between voluntary disclosure and the cost of capital.     

Revisiting the relation between environmental performance and environmental disclosure: An empirical analysis

Previous empirical evidence provides mixed results on the relationship between corporate environmental performance and the level of environmental disclosures. We revisit this relation by testing competing predictions from economics based and socio-political theories of voluntary disclosure using a more rigorous research design. In particular, we improve on the prior literature by focusing on purely discretionary environmental disclosures and by developing a content analysis index based on the Global Reporting Initiative sustainability reporting guidelines to assess the extent of discretionary disclosures in environmental and social responsibility reports. This index better captures firm disclosures related to its commitment to protect the environment than the indices employed by prior studies. Using a sample of 191 firms from the five most polluting industries in the US, we find a positive association between environmental performance and the level of discretionary environmental disclosures. The result is consistent with the predictions of the economics disclosure theory but inconsistent with the negative association predicted by socio-political theories. Nevertheless, we show that socio-political theories explain patterns in the data (“legitimization”) that cannot be explained by economics disclosure theories.     

Reviewing IFRS Goodwill Accounting Research: Implementation Effects and Cross-Country Differences

We review 42 studies from 2008 to early 2017 about IFRS goodwill accounting choices for recognition, impairment, and disclosure of goodwill, focusing on cross-country evidence of implementation effects. We develop a model of application of goodwill accounting based on IFRS 3, IAS 36, and country- and firm-level influences to analyze the research and to summarize existing evidence about goodwill accounting choices. We report evidence in support of IFRS accounting for goodwill recognition, impairment, and disclosure from many countries. However, evidence regarding value relevance is mixed. Overall, there is a lack of cross-country evidence regarding factors affecting goodwill accounting. Many studies show goodwill recognition, impairment, and disclosure are associated with economic and firm factors, and there is some evidence about the impact of managerial incentives and a lack of timeliness in impairment recognition. There is scope for more cross-country studies showing how institutional factors affect the application of IFRS 3 and IAS 36.     

Cybersecurity awareness and market valuations

This paper introduces a measure of firm-specific cybersecurity awareness that can be used in empirical research exploring cyber-related issues facing corporations. It extends and updates Gordon et al. (2010), who develop an indicator capturing the existence of disclosures related to “information security” and show a positive association between market valuation and their measure. Since publication of their paper, cyber-related events have become more frequent and salient, and disclosure of cybersecurity issues has become more extensive. Increased disclosure is largely due to a 2011 requirement by the Securities and Exchange Commission, which provides guidance for disclosure of cyber-related issues in 10-K filings. Based upon this post-guidance disclosure, we develop a new measure that captures the extent and relevance of cyber disclosures and show that the market positively values cybersecurity awareness. We also show that a more negative tone in cyber disclosures is associated with lower market values. Our results are robust to inclusion of measures of IT governance and controlling for the firm’s overall disclosure characteristics.     

The relevance of environmental disclosures: Are such disclosures incrementally informative?

Establishing the information content of transparent voluntary environmental disclosures and the source of this information content is of fundamental importance for corporate social responsibility (CSR) practitioners. Our results indicate that: (1) incremental to information provided by current Toxics Releases Inventory (TRI) data, voluntary environmental disclosures provide valuation relevant information; (2) the various disclosure categories are similar in value relevance, implying that each category is informative of management’s current environmental strategies; (3) current TRI is positively associated with cost of capital but there is no association between voluntary environmental disclosures and cost of capital; and (4) taken together, the above results point to a signaling role for such disclosures and financial performance prediction as the means by which voluntary environmental disclosures enhance firm value. This advances the literature by pinning down the source of firm value enhancement of such disclosures. Our results suggest that a proactive environmental strategy and the signaling of such a strategy to investors can enhance a firm’s stock price, a finding which will assist CSR practitioners in convincing top management that proactive environmental strategies combined with transparent voluntary environmental disclosures are worthwhile.     

The potential harms of goodwill impairment avoidance: Evidence based on future performance and stock prices

The rapidly increasing volume of goodwill assets in the capital market generates potential risks due to the possibility of an untimely recognition of goodwill impairment. In this paper, we investigate the financial consequences of goodwill impairment avoidance based on firms’ future performance and stock prices. Using Chinese A-share listed firms with goodwill balances, we find that avoiding goodwill impairments negatively affects a firm’s performance growth and increases its risk of a future stock price crash. These adverse effects continue for the three years following the goodwill impairment avoidance. Our results indicate that goodwill impairment avoidance has detrimental impacts on a firm’s future performance and stock price and that these impacts are persistent. Our conclusions are helpful for regulators on how to prevent the risks hidden in goodwill impairment recognition and maintain the stable development of the financial market.     

International operations and voluntary disclosures by U.S.-based multinational corporations

This study uses analysts' ratings of firms' disclosures to examine how the differences between U.S. and foreign disclosure environments affects the voluntary disclosures of U.S.-based multinational corporations. We hypothesize that these different disclosure environments discourage U.S-based multinationals from releasing costly information to competitors. Examining how these differences impact U.S. MNCs' reporting may further our understanding of the relationship between voluntary disclosures and differences among countries' accounting standards. Furthermore, it may explain how convergence of mandated accounting standards might impact voluntary disclosures. Controlling for industry membership, firm size, profitability, earnings-return relations, and capital market activity, we find that U.S. firms with more extensive foreign operations tend to provide fewer voluntary disclosures. These results are most robust for informal and flexible disclosures, such as investor relations, where the findings indicate a negative relation between foreign operations and disclosure.     

The usefulness of firm risk disclosures under different firm riskiness,investor-interest,and market conditions: New evidence from Finland

To date, there is only meager research evidence on the usefulness of mandatory annual report risk disclosures to investors. Although it has been argued that corporate disclosure decreases information asymmetry between management and shareholders, we do not know whether investors benefit from high-quality risk reporting in a highly regulated risk disclosure environment. In this paper, we performed association tests to examine whether the quality of firms' mandatory risk disclosures relate to information asymmetry in the Finnish stock markets. In addition, we analyzed whether the usefulness of risk disclosures depends on contingency factors such as firm riskiness, investor interest, and market condition. We demonstrate that the quality of risk disclosure has a direct negative influence on information asymmetry. We also document that risk disclosures are more useful if they are provided by small firms, high tech firms, and firms with low analyst coverage. We also found that momentum in stock markets affects the relevance of firms' risk reports.     

Investor overlap and diffusion of disclosure practices

I develop and test an investor demand-driven explanation for why one firm’s change in voluntary disclosure behavior is emulated by some firms in the industry but not others. I focus on the overlap in institutional investor ownership between two firms as a mechanism by which a first-mover firm’s increase in disclosure prompts investors to seek a similar increase from a follower firm. Using 10-K market risk disclosures as my empirical setting, I find that a firm’s decision to follow a first mover in providing more quantitative information than is required by the SEC is positively associated with an increase in investor overlap from the prior year. I also find that the association is stronger for overlap in large institutional investors, consistent with their greater influence over managers, and for firms where investor uncertainty is high. This association is found after controlling for the herding effect documented in prior studies and after addressing potential endogeneity concerns. Overall, this evidence provides new insight into patterns of intra-industry disclosure behavior and highlights investor overlap as a communication channel and feedback mechanism that helps facilitate the diffusion of disclosure practices.     

Shareholder activism and voluntary disclosure

We examine the relation between shareholder activism and voluntary disclosure. An important consequence of voluntary disclosure is less adverse selection in the capital markets. One class of traders that finds less adverse selection unprofitable is activist investors who target mispriced firms whose valuations they can improve. Consistent with this idea, we find that managers issue earnings and sales forecasts more frequently when their firm is more at risk of attack by activist investors, and that these additional disclosures reduce the likelihood of becoming an activist’s target. These additional disclosures also prompt a positive price reaction, contain more precise guidance, and exceed prevailing market expectations. These findings imply that managers use voluntary disclosure to preempt activism at their firm, and that activists prefer to target relatively opaque firms.     

The interaction among disclosures,competition, and an internal control problem

This paper studies the effect of an internal control problem on a firm's disclosure policy where firms compete in non-cooperative investment game, with each firm deciding to invest in its current technology or to invest in a non-proprietary innovation. By adopting the innovation, a firm earns higher revenues at the expense of its non-adopting rival. Each principal decides on a disclosure policy for its firm that entails releasing an agent's internal cost report of the firm's current technology to the rival firm. The agent has private information about the current technology's cost and an incentive to overstate the cost. An effect of disclosures is to increase coordination between the firms, which, without a control problem, increases firm profits. However, under the same conditions that disclosures were beneficial without the control problem, disclosures may be harmful to the principal with the control problem because increased coordination between the firms allows the agent to earn higher rents. Competition substitutes for commitment to an investment policy that limits the agent's rents and this disciplining role of competition is diminished with disclosures.     

Discussion of “How disclosure quality affects the level of information asymmetry”

Brown and Hillegeist (2007) examine how disclosure quality relates to information asymmetry. Specifically, the authors show that the negative association between the overall quality of a firm’s disclosures and the average level of information asymmetry is primarily driven by the negative association between disclosure quality and the frequency of information events. My discussion focuses on issues surrounding proxies for information asymmetry and disclosure quality the authors use. I also suggest some venues for future research.     

Internal control quality and information asymmetry in the secondary loan market

We examine the association between disclosure of internal control deficiencies (ICDs) and information asymmetry (IA) in the US secondary loan market. We also investigate which types of ICDs intensify or mitigate conditions of information asymmetry in the same market. Relying on loan syndication, loan credit rating, financial debt covenants and loan size, we further explore the effect of loan specific characteristics on the association between ICDs and IA. Consistent with our predictions, we find that while ICDs increase information asymmetry in the secondary loan market, the inimitable characteristics in the secondary loan market (e.g., syndication, loan credit rating, financial covenants, and loan size) help to mitigate such negative consequences of the disclosure of ICDs on the firm’s informational environment. We further find that disclosures of ICDs for firms in regulated industries help to mitigate the negative consequences of ICDs disclosures on IA.     

Disclosure of Intended Use of Proceeds and Underpricing in Initial Public Offerings

We use the context of a company's initial public offering (IPO) of equity securities as a capital‐markets setting to empirically study the economic consequences of endogenous disclosure. In particular, we examine the relation between the extent of dollar detail an IPO issuer provides regarding their intended use of proceeds and first‐day underpricing. We document substantial variation in the specificity of this disclosure and find that an increase in such specificity is associated with lower IPO underpricing. Overall, our results suggest that IPOs that provide specific use‐of‐proceeds disclosures have less ex ante uncertainty, in the sense that these disclosures help investors estimate the dispersion of secondary market values. Our paper contributes to the empirical accounting literature by documenting an association between voluntary disclosure and what is arguably the foremost cost of raising initial equity capital (i.e., IPO underpricing).     

Firm-specific determinants of continuous corporate disclosures

Continuous disclosure is the immediate release of material information by issuers within a regulatory and information dissemination framework. Under such a regime, the market is informed at all times and no investor is disadvantaged by lack of access to information. We attempt to identify the firm-specific determinants of these disclosures.We examine the frequency and regularity of online announcements on the stock exchange websites of companies included in the Morgan Stanley Capital Index for small-cap firms in eight developed markets in Asia and Europe. We find that firms with higher information asymmetry have a higher frequency and regularity of continuous online reporting. Our results also show that the frequency and regularity of online disclosure is positively associated with agency costs, earnings, and analyst following and is inversely related to the length of the product cycle of a firm. Our results are more robust for discretionary disclosures. We also find variations in the frequency of disclosures by countries, some of which are explainable by the online disclosure settings of the countries.     

Voluntary Environmental Disclosures by Large UK Companies

Abstract:  This paper examines the patterns in voluntary environmental disclosures made by a sample of large UK companies. The analysis distinguishes between the decision to make a voluntary environmental disclosure and decisions concerning the quality of such disclosures and examines how each type of decision is determined by firm and industry characteristics. We find that larger, less indebted companies with dispersed ownership characteristics are significantly more likely to make voluntary environmental disclosures, and that the quality of disclosures is positively associated with firm size and corporate environmental impact. We find significant cross-sector variation in the determinants of both the participation and quality decisions. Furthermore, the manner of this variation differs between the two.