Are Investors Sensitive to the Quality and the Disclosure of Financial Statements?

This paper investigates the influence of Swiss firms' disclosurepolicy and of their financial analysts' coverage on stock priceabnormal reactions to the publication of the annual reports.It first shows that, after controlling for the number of analysts,the absolute abnormal returns are significantly and positivelyaffected by the rating measure used as a proxy of the informationalquality of annual reports. It furthermore emphasises asymmetryin the relationship between stock price abnormal reactions andtwo informational variables, namely the quality of the firm'sdisclosure policy and its financial analysts' coverage. It appearsthat while positive abnormal returns are significantly and positivelyrelated to the rating variable, negative abnormal returns areonly affected by the number of financial analysts. The inverserelationship between abnormal negative returns and the financialanalysts' coverage supports the fact that competition amonganalysts reduces investors' adverse selection problem. Finally,the study evidences a non-linear relationship between ratingand positive abnormal returns which is meaningful for the "good"and "very good type" firms and thus emphasises the signalingrole played by a firm's financial disclosure policy.     

Are Investors Sensitive to the Quality and the Disclosure of Financial Statements?

This paper investigates the influence of Swiss firms'disclosure policy and of their financial analysts'coverage on stock price abnormal reactions to thepublication of the annual reports. It first showsthat, after controlling for the number of analysts,the absolute abnormal returns are significantly andpositively affected by the rating measure used as aproxy of the informational quality of annual reports.It furthermore emphasises asymmetry in therelationship between stock price abnormal reactionsand two informational variables, namely the quality ofthe firm's disclosure policy and its financialanalysts' coverage. It appears that while positiveabnormal returns are significantly and positivelyrelated to the rating variable, negative abnormalreturns are only affected by the number of financialanalysts. The inverse relationship between abnormalnegative returns and the financial analysts' coveragesupports the fact that competition among analystsreduces investors' adverse selection problem. Finally,the study evidences a non-linear relationship betweenrating and positive abnormal returns which ismeaningful for the ``good' and ``very good type' firmsand thus emphasises the signaling role played by afirm's financial disclosure policy.     

Is Financial Reporting Still Useful? Australian Evidence

There has been recent and growing criticism of the usefulness of financial reporting for investors, particularly the annual financial statements. In response, the IASB is pursuing several projects aimed at improving the relevance of financial information. To inform the IASB’s work, we investigate, using a mixed-method approach, the extent and nature of the use of annual financial statements by equity investors. We examine the relevance of financial reporting for equity valuation in Australia across time. We find that financial reporting (specifically, reported net income, shareholders’ equity, and operating cash flows) remains relevant for investment decisions. We further support this finding with evidence from field interviews that provide insight into how and why financial statements are used by equity investors. The field evidence also demonstrates that no one financial statement dominates in investor decision making. Given the increasing availability of more timely, forward-looking information from alternative sources, we examine the relevance of non-GAAP financial information and other non-financial information for investor decision making. We find that non-GAAP financial information (as proxied by EBIT and EBITDA) is more value relevant than statutory measures. We further find a broad range of non-financial information is utilized by investors in making investment decisions both as a ‘screen’ and for valuation purposes. Our findings inform regulators and other stakeholders as we provide evidence of the continuing relevance of financial statements and the complementary role of non-GAAP financial and other information. Our evidence provides a rebuttal to the recent criticism.     

Financial Reporting by Charities: Why Do Some Choose to Report Under a More Extensive Reporting Framework?

While voluntary disclosure theory posits that profit-oriented companies voluntarily disclose information to increase their market value, this does not explain why a charity would report in accordance with a more comprehensive financial reporting framework than required. Using a unique financial reporting framework choice available in Australia, our study examines factors associated with large charities’ choice of a General Purpose Financial Statements (GPFS) reporting framework, which encompasses expansive financial reporting requirements, versus a Special Purpose Financial Statements (SPFS) reporting framework, where management, within limits, effectively chooses that subset of accounting standards applicable to that charity. For those preparing GPFS, we then examine the factors that determine those charities that report in accordance with the complete set of Australian Accounting Standards (Tier 1) versus Reduced Disclosure Requirements (Tier 2). Using manually collected data from 11,471 large-registered charities for 2014–2016, we find that the economic importance of the charity, its funding sources, and level of indebtedness are significant in explaining charities choosing a more comprehensive financial reporting framework. Further, we find a substantial increase in the proportion of large charities electing to disclose GPFS-Tier 2 over this three-year window. The choice of a large audit firm (Big 4 and mid-tier audit firms) is significantly associated with charities both lodging more comprehensive GPFS, and also reporting GPFS in accordance with the less onerous GPFS-Tier 2 framework. Our results provide insights into voluntary reporting choices made by charities and inform charities, accounting firms, and regulators of factors influencing charities’ choice of financial reporting frameworks.     

What is a Conceptual Framework for Financial Reporting?

ABSTRACT

Despite more than forty years of exploration into constructing a conceptual framework (CF) for financial reporting the question ‘What is a CF?’ has not been adequately answered. The result is that those who construct CFs are not guided by a clear concept of a CF and communication about CFs is undermined by differences in understanding what it is. There has been a failure to undertake conceptual enquiry into the nature of a CF or into the expressions used in describing it. This paper addresses this failure by undertaking such a conceptual enquiry. Existing explanations of CFs are examined and found to be inadequate. What is wanted from a CF is identified and explained and this is used to prescribe what should be understood by the expression ‘conceptual framework’. A new characterisation of CFs is given that should assist any future construction of new CFs. Problems that may be faced by those who seek to construct a CF are identified.     

What Are You Saying? Using topic to Detect Financial Misreporting

We use a machine learning technique to assess whether the thematic content of financial statement disclosures (labeled topic) is incrementally informative in predicting intentional misreporting. Using a Bayesian topic modeling algorithm, we determine and empirically quantify the topic content of a large collection of 10-K narratives spanning 1994 to 2012. We find that the algorithm produces a valid set of semantically meaningful topics that predict financial misreporting, based on samples of Securities and Exchange Commission (SEC) enforcement actions (Accounting and Auditing Enforcement Releases [AAERs]) and irregularities identified from financial restatements and 10-K filing amendments. Our out-of-sample tests indicate that topic significantly improves the detection of financial misreporting by as much as 59% when added to models based on commonly used financial and textual style variables. Furthermore, models that incorporate topic significantly outperform traditional models when detecting serious revenue recognition and core expense errors. Taken together, our results suggest that the topics discussed in annual report filings and the attention devoted to each topic are useful signals in detecting financial misreporting.     

Does the Quality of Financial Advice Affect Prices?

Using a large data sample of 58,562 new municipal issues covering the period from 1984 to 2002, we examine whether the quality of advice provided by a financial advisor affects new issue interest costs. We find that higher‐quality financial advisors are associated with statistically significant decreases in new issue yields. The effect of advisor quality on yields is more pronounced for revenue, negotiated, and opaque bond issues than for general obligation and competitively sold issues. However, issuers of revenue or negotiated bonds are more likely to choose a low‐quality advisor.     

What Causes Fraudulent Financial Reporting? Evidence Based on H Shares

This paper investigates fraudulent financial reporting (FFR) in the China-based companies listed on the Hong Kong Stock Exchange (called H shares) in which Chinese government officials have a high degree of involvement and heavy impact on audit quality and corporate governance. It intends to find out the causes of FFR, the opportunities that make such reporting possible, and whether the presence of politically connected executives creates an environment that is conducive to FFR. The results show that the corporate environment most likely to lead to FFR is characterized by earnings management accounting practices.     

Disclosure Overload? An Empirical Analysis of International Financial Reporting Standards Disclosure Requirements

Despite the positive effects of the adoption of International Financial Reporting Standards (IFRS) noted in the literature, standard setters have issued reports suggesting that the required disclosures in IFRS have become too burdensome and should be reduced. We examine this disclosure overload problem by testing whether the disclosure reduction recommendations of the Excess Baggage Report issued by professional accounting bodies from Scotland and New Zealand in 2011 are associated with companies’ disclosure incentives and are value relevant for a sample of 196 Australian listed companies. The Excess Baggage Report classifies current IFRS disclosure requirement items into three categories: Retain; Delete; and Disclose if Material. We find that Retain items are disclosed the most, followed by those classified as Disclose if Material, and then by Delete items. Only Retain items are significantly associated with companies’ disclosure incentives. We also find that these disclosure categories are value relevant, especially for below-median profitability firms. Our findings may provide input to the IASB’s ongoing Disclosure Initiatives project.     

Does Integrated Reporting Matter to the Capital Market?

Integrated reporting (<IR>) is an emerging international corporate reporting initiative to address limitations to extant corporate reporting approaches, which are commonly criticized for being both voluminous and disjointed. While <IR> is gaining in popularity, current momentum has been limited due to a lack of clear evidence of its benefits. Utilizing the most suitable setting currently available, being discretionary disclosures made by listed companies on the Johannesburg Stock Exchange, this study provides evidence that analyst forecast error reduces as a company's level of alignment with the <IR> framework increases. Further, the improved alignment is associated with a subsequent reduction in the cost of equity capital for certain reporting companies. The results are obtained after controlling for factors relating to financial transparency and the issuance of standalone non‐financial reports, which suggests that <IR> is providing incrementally useful information to the capital market over and above existing reporting mechanisms.     

How Prepared was Australia for International Financial Reporting Standards? The Case of Listed Firms

We measure the preparedness of listed firms for international financial reporting standards (IFRS) by changes in explanations from Australian GAAP to IFRS between the half-year and annual accounts. About one-third of sample firms changed their explanations for earnings, cashflows or equity by averages of about −7%, 67% and 3% respectively. Most changes are less than 5% for earnings and equity, and tax is the item most commonly revised. More profitable firms and firms with more reconciling items are most likely to change an explanation. In a telephone survey of chief financial officers, 70% revealed that the change followed an incorrect application of an accounting rule in the half-year accounts.     

Are Financial Constraints Priced? Evidence from Firm Fundamentals and Stock Returns

Using comprehensive firm‐ and aggregate‐level data, this paper studies the real and financial implications of capital market imperfections. We first examine whether financially constrained firms' business fundamentals (capital spending and operating earnings) are more sensitive to macroeconomic movements than unconstrained firms' fundamentals. We then examine whether financial constraint “return factors” respond to macroeconomic shocks in tandem with the responses from business fundamentals. The evidence in this paper points to financial constraints affecting both fundamental quantities and asset returns.     

How Actuarial Assumptions Affect Defined Benefit Obligations under International Financial Reporting Standards? Evidence from Korea

This paper examines how actuarial assumptions affect defined benefit obligations (DBOs) under the newly adopted Korean International Financial Reporting Standards (K‐IFRS) with the help of evaluation reports provided by the pension provider. The results show that there is no significant discrepancy between the DBOs estimated on a going concern basis under K‐IFRS, and the retirement benefits estimated on a non‐going concern basis under traditional K‐GAAP. Also, the rate of salary increase, average salary and average years of service have a statistically significant positive impact on DBOs, irrespective of the adoption of K‐IFRS.     

How Large Are Housing and Financial Wealth Effects? A New Approach

This paper presents a simple new method for measuring “wealth effects” on aggregate consumption. The method exploits the stickiness of consumption growth (sometimes interpreted as reflecting consumption “habits”) to distinguish between immediate and eventual wealth effects. In U.S. data, we estimate that the immediate (next quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. We argue that our method is preferable to cointegration‐based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector.     

Introduction to the Financial Street

The reply of the State Council to the Overall Planning of Beijing City as of October 1993 clearly pointed out that "the national financial management center shall be set up in the area of Financial Street in the belt from Fuchengmen