Does voluntary balance sheet disclosure mitigate post-earnings-announcement drift?

Theory suggests that balance sheet information such as total assets, total equity, or total liabilities complements earnings information in helping investors assess a firm’s profitability and estimate earnings growth. The voluntary disclosure of balance sheet information at earnings announcement could help investors gather and process this information at a lower cost. We therefore predict that voluntary balance sheet disclosure at the time of an earnings announcement helps investors promptly understand the implication of current earnings news for future earnings and subsequently reduces post-earnings-announcement drift (PEAD). Consistent with these predictions, our results show that when firms provide voluntary balance sheet disclosures, the earnings response coefficient in the event window is significantly higher and the corresponding PEAD is significantly lower. We further find that the impact of voluntary balance sheet disclosure on PEAD is more pronounced when the magnitude of balance sheet value surprise is larger, when balance sheet value is more informative about future earnings, when earnings uncertainty is higher, or when information cost is higher, consistent with our conjectures that helping investors to better understand future earnings performance and lowering information costs are key mechanisms underlying the effect of voluntary balance sheet disclosure on PEAD.     

Board structure and the informativeness of risk disclosure: Evidence from MENA emerging markets

We examine whether board characteristics affect firms' decision to voluntarily disclose informative information about their risk profiles. We base our study on data from 320 listed firms in nine MENA emerging markets (789 observations) over the period from 2007 to 2009. Our study offers significant contributions to the growing risk disclosure literature. It provides new empirical evidence that information driven by some board characteristics affects the perceived relevance of narrative risk information. Our findings suggest that the composition of the board and its size enhance the informativeness of risk disclosure as it allows investors to better predict future earnings growth. A further finding is that a CEO/Chairperson duality does not impact the way investors trust risk disclosures.     

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.     

Does location matter for disclosure? Evidence from geographic segments

The segment disclosures of multinational companies provide strategic information. We use the location characteristics of geographic segments to identify the reasons for withholding or disclosing segments. We examine segment data from around the adoption of IFRS 8, a reporting standard that requires firms to reveal more disaggregated information. Consistent with a proprietary cost motive for nondisclosure, we find that segments in regions that are deemed better for business tend to be hidden, while higher entry barriers for a segment are positively related to disclosure. These effects appear to be stronger for firms for which proprietary cost motives are more important. Among the previously unrevealed segments, proprietary costs explain the nondisclosure of segment earnings and other relevant financial information for investors.     

Non‐GAAP Earnings Disclosure in Loss Firms

This study examines the incremental information in loss firms’ non‐GAAP earnings disclosures relative to GAAP earnings. Using a large sample obtained through textual analysis and hand‐collection, we posit and find that loss firms’ non‐GAAP earnings exclusions offset the low informativeness of GAAP losses for forecasting and valuation. Loss firms’ non‐GAAP earnings are highly predictive of future performance and are valued by investors, while the expenses excluded from GAAP earnings are not. Additional tests suggest that loss firms disclosing non‐GAAP profits have significantly better future performance than GAAP‐only loss firms and are not overvalued by investors. Comparing non‐GAAP earnings of profitable firms to those of loss firms, we find that loss firms’ non‐GAAP metrics are significantly more predictive and less strategic. We conclude that non‐GAAP earnings disclosures are particularly informative about loss firms and help investors disaggregate losses into components that have differential implications for forecasting and valuation.     

The Impact of AASB 8 Operating Segments on Analysts’ Earnings Forecasts: Australian Evidence

This paper evaluates the impact of firms’ adoption of AASB 8 segment disclosure rules on analysts’ earnings forecasts. It examines whether providing more disaggregated segment information following the adoption of AASB 8 is associated with an increase in analysts’ ability to forecast earnings. We find that analysts’ earnings forecasts have not improved significantly after adopting AASB 8 in Australia, regardless of whether firms disclosed more disaggregated segment information. Our use of control firms provides assurance that the results are due to AASB 8 and not to some other events concurrent with the adoption of AASB 8. Overall, our results imply that the benefits associated with the management approach as experienced by financial analysts in the United States have not been realised by financial analysts in Australia. This suggests that the successful adoption of an accounting standard in one country should not be the justification for recommending adoption in other countries. Further, our results raise questions about whether the enhanced disclosures required in the new standard are more for the other users of financial statements, such as investors, rather than analysts.     

Earnings Performance and Discretionary Disclosure

While the influence of earnings performance on disclosure is a fundamental issue in the disclosure literature, our understanding of this influence is limited. In this paper, I examine a comprehensive set of disclosures from a sample of firms experiencing an extended period of seasonally adjusted earnings increases. I study how these firms adjust disclosure in response to earnings increases, how disclosure changes as the period of strong earnings performance nears an end and how firms disclose during a subsequent period of earnings decline. I find an increase in disclosure during the period of increased earnings. This increase is pervasive across all types of disclosure and tends to be bundled with earnings announcements. The market responds positively to this disclosure. Firms continue to disclose at a high level as they approach earnings declines. However, they shift to disclosures that focus on the positive short-term results and do not discuss the impending decreases. While this behavior is systematic, the market does not appear to anticipate the subsequent earnings declines. Once the firms announce earnings declines, the magnitude of disclosure returns to the level provided prior to the increased earnings.     

The relation between non-GAAP earnings and accounting restatements: Evidence after regulation G

Scholarly findings on whether disclosure of Non-GAAP earnings is informative or opportunistic are inconsistent. Since the 2003 implementation of Regulation G, investors can view management's process of adjusting from GAAP earnings to Non-GAAP earnings. This study investigates the information content of Non-GAAP earnings in the context of restatements. The hypotheses of this study are based on the following two propositions. First, the informativeness of Non-GAAP earnings is determined by the nature of items excluded from GAAP earnings to derive Non-GAAP earnings (either nonrecurring special items or recurring exclusions). Second, restatements can be used to distinguish between informative and opportunistic Non-GAAP earnings disclosures. My results show that firms with restatements, especially fraud or core earnings restatements, exhibit greater relative use of Non-GAAP earnings disclosures that adjust GAAP earnings for positive other exclusions (recurring expenses). By contrast, disclosures of Non-GAAP earnings derived by excluding nonrecurring expenses (special items) from GAAP earnings are not associated with restatements.     

Institutional Investor Protection Pressures versus Firm Incentives in the Disclosure of Integrated Reporting

Corporate disclosures aim to decrease the expectation gap between investors, decrease the advantage of informed investors and consequently reduce information asymmetry. However, the existence of higher numbers of companies’ reports makes the decision making of firms’ stakeholders difficult. To avoid these problems, companies have started to disclose integrated reports. Previous studies have observed that this voluntary corporate disclosure is a consequence of large firms’ incentives associated with preventing abnormal earnings. In this paper, we examine whether these internal factors have a lower/higher impact than institutional contracting pressures. Our results are evidence that firms’ incentives are the main determinants of the voluntary disclosure of integrated reports, and we observe that there is a substitutive role between institutional country pressures and firms’ transparency decisions. However, the contracting environment plays a complementary role when firms suffer from lower asymmetry problems.     

The Impact of Disclosures of Internal Control Weaknesses and Remediations on Investors' Perceptions of Earnings Quality

We hypothesize and find that firms making SOX‐mandated disclosures of material weaknesses in internal control over financial reporting (ICOFR) exhibit lower investor‐perceived earnings quality (IPEQ) than nondisclosers. We measure IPEQ using e‐loading, a market‐returns–based representation of earnings quality developed by Ecker, Francis, Kim, Olsson, and Schipper (2006). Firms do not exhibit decreases in IPEQ after initially disclosing material weaknesses. This is consistent with investors having anticipated ICOFR strength based on observable firm characteristics. However, firms exhibit increases in IPEQ after receiving their first clean audit reports that confirm the remediation of previously disclosed weaknesses. This indicates that, although investors do not find initial weakness disclosures to be incrementally informative, SOX motivates firms to remediate weak controls and provides a venue for credible remediation disclosures, thus enhancing investors' perception of financial reporting reliability. These findings are consistent with the existence of regulatory benefits associated with SOX's internal control disclosure and audit requirements.     

The effect of economic policy uncertainty on investor information asymmetry and management disclosures

Investor uncertainty about firm value drives investors’ information collection and trading activities, as well as managers’ disclosure choices. This study examines an important source of uncertainty that likely cannot be influenced by most managers and investors: uncertainty about government economic policy. We find that this uncertainty is associated with increased bid-ask spreads and decreased stock price reactions to earnings surprises. Managers respond to this uncertainty by increasing their voluntary disclosures, but these disclosures only partly mitigate the bid-ask spread increase. We conclude that government economic policy uncertainty is an important component of firms’ information environments and managers’ voluntary disclosure decisions.     

Disclosure of GAAP line items in earnings announcements

We provide new evidence on the disclosure in earnings announcements of financial statement line items prepared under Generally Accepted Accounting Principles (GAAP). First, we investigate the circumstances that might provide disincentives generally for GAAP line item disclosures. We find that managers who regularly intervene in the earnings reporting process limit disclosures at the aggregate level and in each of the financial statements so as to more effectively guide investor attention to summary financial information. Specifically, this disclosure behavior obtains when managers habitually cater to market expectations, engage in income smoothing, or use discretionary accruals to improve earnings informativeness. Second, we predict and find that the specific GAAP line items that firms choose to disclose are determined by the differential informational demands of their economic environment, consistent with incentives to facilitate investor valuation. However, these valuation-related disclosure incentives are muted when managers habitually intervene in the earnings reporting process.     

The consequences of deviating from financial reporting industry norms: Evidence from the disclosure of foreign cash

This study examines how investors respond to firms’ disclosure practices that deviate from the majority of industry peers (i.e., industry norms). The SEC has made repeated calls for the disclosure of foreign cash in order for investors to have more information in determining firms’ liquidity positions. We examine the association between firm value and the non-disclosure of foreign cash in industries where the majority of firms choose to disclose foreign cash. We define partial disclosure as disclosing permanently reinvested earnings (PRE), but withholding the disclosure of foreign cash, and find that when the majority of industry peers disclose foreign cash, investors discount the firm-specific partial disclosure of foreign operations. This finding suggests that investors have similar information demands as the SEC, and that withholding foreign cash results in a valuation discount. We also find that this discount is more pronounced for firms predicted to have higher levels of foreign cash and higher levels of PRE. The discount in firm value is also concentrated among firms with managers who have more career concerns, suggesting that managers shift the cost of partial disclosure to shareholders instead of bearing the personal reputational cost of full disclosure. Our results are robust to multiple matched samples and entropy balancing. While previous literature has considered the valuation implications of foreign cash disclosures, we reveal the consequences of opting to withhold the disclosure of foreign cash. Our findings should be of interest to both managers and policy-setters in forming their disclosure protocols.     

The Impact of the Disclosure of Non‐GAAP Earnings in Australian Annual Reports on Non‐Sophisticated Users

The disclosure of non‐GAAP earnings in Australian annual reports has risen steadily in recent years. These non‐statutory earnings measures are generally disclosed in the unaudited section of the annual report and are not consistent with statutory profit as defined under generally accepted Australian accounting standards (GAAP). Recent research conducted in the United States (US) has provided evidence that non‐sophisticated investor decisions are influenced by the presence and prominence of non‐GAAP earnings information. Further evidence suggests that investor perception changed after non‐GAAP earnings disclosures became subject to regulation in that jurisdiction. Australia has high investor participation rates by international standards, including investors operating self‐managed superannuation funds, resulting in a significant number of active individual investors. This study employs an experimental design to investigate the impact on non‐sophisticated investors of the reporting of non‐GAAP earnings information in addition to GAAP earnings information in Australian annual reports. The results of this study show a positive association between the prominent disclosure of non‐GAAP earnings information and non‐sophisticated investor reliance on this information. These results provide important evidence to Australian regulators as these narrative disclosures are not subject to regulation, in contrast to the US where mandatory regulation has been in place since 2003.     

Social disclosure, financial disclosure and the cost of equity capital

We test the relation between financial and social disclosure and the cost of equity capital for a sample of Canadian firms with year-ends in 1990, 1991 and 1992. We find that, consistent with prior research, the quantity and quality of financial disclosure is negatively related to the cost of equity capital for firms with low analyst following. Contrary to expectations, there is a significant positive relation between social disclosures and the cost of equity capital. This positive relationship is mitigated among firms with better financial performance. We consider some biases in social disclosures that may explain this result. We also note that social disclosures may benefit the firm through its effect on organizational stakeholders other than equity investors.     

Line-of-Business Disclosures and Spin-Off Announcement Returns

We investigated disclosure decisions by identifying a circumstance, the spin-off of a segment, where the benefits of disclosure should outweigh the costs. We compared the valuation revisions associated with spin-off announcements of firms with previous line of business disclosures to valuation revisions of firms making spin-off announcements without these disclosures. We found significant stock price increases associated with the spin-off announcement regardless of prior segment disclosure history. We also found, however, that the stock price increases were temporary for firms without prior segment disclosures, while the valuation revisions for firms with previous line-of-business disclosure information persisted.Data Availability: The data employed in this study are available from the sources identified in the text.     

The relation between segment disclosure and earnings quality

We investigate the relation between segment disclosure and earnings quality. Using a US sample for the period 2001–2006, we find a positive relation between earnings quality and the quantity of segment disclosures. We use lead-lag tests to examine the flow of causality, and our results show that current segment disclosure is positively related to prior levels of earnings quality, while current earnings quality scores are not related to prior levels of segment disclosure. Thus, the causality flows from earnings quality to segment disclosure. Our results hold for both business and geographic segment disclosure.     

Value relevance of earnings: Evidence from Middle Eastern and North African Countries

Researchers as well as regulators are increasingly more interested in enhancing their understanding of the factors that influence value relevance of reported earnings in financial statements. In the light of globalization and increased exposure to international accounting practices, a better comprehension of factors contributing to or reducing value relevance of earnings is essential. This paper investigates the value relevance of earnings and its components for a number of Middle Eastern and North African (MENA) countries. Additionally, the paper examines how differences in levels of mandated disclosures, source of accounting standards, and legal systems moderate the informativeness of earnings to investors. We find that mandated disclosure and source of accounting standard, (especially non-governmental source) are positively associated with earnings informativeness. Additionally, MENA countries with French civil law and systems have lower value relevance relative to countries in our sample with English and related legal codes. Further, the firms that have adopted international financial reporting standards have higher value relevance than firms in MENA countries which adhere to local standards.     

Causal disclosures on earnings and earnings management in an IPO setting

We examine the association of earnings management and narrative impression management as reflected in properties of causal explanations of reported earnings in the prospectus of Chinese IPO firms. Anticipated earnings management concerns are argued to be a significant incentive for causal disclosures on earnings in order to rationalize and legitimize earnings outcomes. We find evidence of close alignment of a firm’s earnings management propensity and its use of tactical causal disclosures. Stronger earnings management is associated with more intense assertive causal disclosure. On the other hand, firms exhibiting stronger earnings management tend to avoid the use of explicit defensive causal disclosure tactics. These findings are consistent with the strong background expectations of managerial agency and control that pervade an IPO setting. Our evidence holds after controlling for endogeneity within the context of an opportunistic disclosure position.     

Disclosure timing: Determinants of quarterly earnings release dates

Existing research on discretionary disclosures provides valuable insights on the potentials causes and consequences of alternative forms of disclosure. However, relatively little is known about how managers choose to time the release of financial information. This paper focuses on the quarterly earnings release dates and investigates why some choose to release earnings information relatively early, compared to others. The results indicate that the reporting lag (days between fiscal period end and quarterly earnings release date) is shorter for firms facing greater demand for information from investors and greater litigation costs. The reporting lag, however, is longer for firms with greater block ownership and those whose operations are somewhat more complex.