The association between employee stock option disclosures and corporate governance: Evidence from an enhanced disclosure regime

This study examines the role of corporate governance in employee stock option (ESO) disclosures following the revision of AASB 1028 Employee Benefits in 2001. We find that, while firms do not fully comply with AASB 1028 ESO disclosures, they voluntarily provide other ESO disclosures. In relation to corporate governance measures that have a role in the financial reporting process, we find two corporate governance measures dominate our results—the quality of auditor and duality of the role of CEO and Chair of the Board of Directors. We show that, in general, external auditor quality has positive incremental association with both mandatory and voluntary ESO disclosures while the dual role of CEO and chairperson of the board is associated with lower levels of mandatory disclosure.     

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.     

Disclosure of the impacts of adopting Australian equivalents of International Financial Reporting Standards

This study investigates two disclosure variables (Extent and Quality) in relation to compliance with paragraph 4.1 (b) of AASB 1047 Disclosing the Impacts of Adopting Australian Equivalents to International Financial Reporting Standards. Using a sample of 150 Australian listed firms, I find that the extent and quality of disclosure is influenced by firm size, leverage and auditor firm size, with the latter variable being the most significant. In general, the results suggest that many companies might have relied on sample disclosures provided by their auditors, perhaps limiting both quality and intent. Additionally, the ultimate usefulness of broad and imprecise standards might be questionable. Smaller companies might also require more guidance and assistance with their preparation for the adoption.     

IRS Attention

We study how public and private disclosure requirements interact to influence both tax regulator enforcement and firm disclosure. To capture IRS enforcement activities, we introduce a novel data set of IRS acquisition of firms’ public financial disclosures, which we label IRS attention. We examine the implementation of two new disclosure requirements that potentially alter IRS attention: FIN 48, which increased public tax disclosure requirements, and Schedule UTP, which increased private tax disclosure. We find that IRS attention increased following FIN 48 but subsequently decreased following Schedule UTP, consistent with public and private disclosure interacting to influence tax enforcement. We next examine how private tax disclosure requirements under Schedule UTP affected firms’ public disclosure responses. We find that, following Schedule UTP, firms significantly increased the quantity and altered the content of their tax‐related disclosures, consistent with lower tax‐related proprietary costs of disclosure. Our results suggest that changes in SEC disclosure requirements altered the IRS's behavior with regard to public information acquisition, and, relatedly, changes in IRS private disclosure requirements appear to change firms’ public disclosure behavior.     

Compliance with goodwill-related mandatory disclosure requirements and the cost of equity capital

Theory suggests that increased levels of corporate disclosure lead to a decrease in cost of equity via the reduction of estimation risk. We examine compliance levels with International Financial Reporting Standard 3 Business Combinations and International Accounting Standard 36 Impairments of Assets mandated goodwill-related disclosure and their association with firms’ implied cost of equity capital (ICC). Using a sample of European firms for the period 2008–2011, we find a median compliance level of about 83% and significant differences in compliance levels across firms and time. Non-compliance relates mostly to proprietary information and information that reveals managers’ judgement and expectations. Overall, we find a statistically significant negative relationship between the ICC and compliance with mandated goodwill-related disclosure. Further, we split the sample between firms meeting (or not) market expectations about the recognition of a goodwill impairment loss in a given year to study whether variation in compliance levels mainly plays a confirmatory or a mediatory role. We find the latter: higher compliance levels matter only for the sub-sample of firms that do not meet market expectations regarding goodwill impairment. Finally, our results hold only in countries where enforcement is strong.     

Family firm disclosure and accounting regulation reform in the Middle East: The case of Jordan

We examine the quality of accounting disclosures by family firms using mandatory and voluntary disclosures as proxies for the quality of disclosure. We find that family firms comply more fully with mandatory disclosure requirements than do non-family firms but they disclose significantly less voluntary information. We also document that the enhanced accounting regulation improves the strength of the association between family ownership and mandatory disclosure compliance. Another important finding is the greater disclosure, both mandatory and voluntary, for firms with high family ownership compared to firms with low family ownership.     

IFRS adoption and analysts’ earnings forecasts: Australian evidence

We study 145 large listed Australian firms to explore the impact of international financial reporting standards (IFRS) adoption on the properties of analysts’ forecasts and the role of firm disclosure about IFRS impact. We find that analyst forecast accuracy improves, and there is no significant change in dispersion in the adoption year, suggesting that analysts coped effectively with transition to IFRS. However, we do not observe the expected relationship between firms’ IFRS impact disclosures in their financial statements issued at the end of the transition year with forecast error and dispersion in the adoption year. The results question the timeliness and usefulness of financial statement disclosure, even in a setting where disclosure was mandated by accounting standards (AASB 1047 and AASB 1) and firms had strong incentives to provide information to analysts.     

Extreme Uncertainty and Forward‐looking Disclosure Properties

This study investigates the effect of extreme uncertainty on disclosure behaviour by analyzing the quality and quantity of forward‐looking disclosures during the global financial crisis and pre‐crisis periods, controlling for other determinants of disclosure behaviour. Prior research has struggled to distinguish between the quality and quantity dimensions of forward‐looking disclosures. Also, the impact of the recent financial crisis on these forward‐looking disclosure attributes has not yet been examined systematically. We address this gap by exploiting the unique setting of German publicly traded firms. These firms must provide forward‐looking information within their audited financial statements, although relevant regulation is sufficiently vague to allow great variation in the quality, scope and quantity of forward‐looking disclosures actually observed. Using hand‐collected data from 2005 to 2009, we provide evidence of a significantly negative association between crisis and disclosure quality. This finding is robust to several different disclosure quality proxies and regression specifications. In contrast, we find no negative significant relation between crisis and disclosure quantity; rather, there is evidence that reported volume increases during the crisis. Our results are consistent with extreme uncertainty, as occurring during times of crisis, negatively affecting the quality of voluntary disclosures, while firms maintain or increase disclosure quantity, ultimately diluting the information density of forward‐looking disclosures.     

Derivatives use and financial instrument disclosure in the extractives industry

This article documents the use and disclosure of derivatives in the Australian extractives industry. We find that derivatives are used by 23 per cent of our sample, with mitigation of commodity risk and foreign exchange risk being the most common purposes for which derivatives are used. The most common types of derivatives used in the sector for hedging purposes are forward rate agreements and options. Results indicate that derivative use is positively associated with financial risk and firm size. We also examine the relation between firm characteristics and the extent of financial instrument disclosure, using a disclosure index based on the additional requirements in IFRS 7 Financial Instruments: Disclosures. Empirical results reveal that large firms with higher leverage, which use derivatives, and are audited by a Big 4 auditor provide more extensive disclosure of financial instruments.     

The economic consequences of increased disclosure: Evidence from international cross-listings

We examine market behavior around earnings announcements to understand the consequences of the increased disclosure that non-U.S. firms face when listing shares in the U.S. We find that absolute return and volume reactions to earnings announcements typically increase significantly once a company cross-lists in the U.S. Furthermore, these increases are greatest for firms from developed countries and for firms that pursue over-the-counter listings or private placements, which do not have stringent disclosure requirements. Additional tests support the hypothesis that it is changes in the individual firm's disclosure environment, rather than changes in its market liquidity, ownership, or trading venue, that explain our findings.     

Compliance Over Time by Australian Firms with IFRS Disclosure Requirements

Prior literature indicates that compliance with International Financial Reporting Standards (IFRS) is not complete in many countries. This study examines practice under the Australian version of IFRS by measuring compliance with the disclosure requirements of eight standards. The study focuses on data drawn from the consolidated financial statements of a sample of the top 200 Australian listed companies. To enable a time‐series analysis of compliance over time, this study examines three reporting years: 2006, 2010 and 2014. This research identifies material non‐compliance among Australian companies, finding that some disclosure items appear to be neglected by companies, such as some of the requirements of AASB 137 Provisions. This non‐compliance raises questions about accounting and audit quality in Australia. It may suggest poor regulatory oversight.     

The effects of firm size,corporate governance quality,and bad news on disclosure compliance

Motivated by calls for increased compliance, size-based regulation, and continued exemption of small firms from internal control reporting requirements, we assess the incremental effects of firm size, corporate governance quality, and bad news on disclosure compliance. We examine compliance with the disclosure requirements of an SEC-mandated filing that requires no computations or complex judgments but is nonroutine and may reveal value-decreasing information (bad news) that otherwise would not become public. The disclosures studied are those that firms provide in Form 8-K Item 4 when changing external auditors. We find that noncompliant firms have lower quality corporate governance and less need for external financing but are not smaller than compliant control firms. Additional analyses indicate that compliance is negatively associated with bad news.     

Management earnings forecast disclosure policy and the cost of equity capital

We examine the relation between management earnings forecast disclosure policy and the cost of equity capital in a cross-section of 1,355 firms over a 4-year post-Regulation Fair Disclosure period (2001 through 2004). We find evidence of a negative association between the quality of management earnings forecasting policy and cost of equity capital, and we document that the strength of the association is greater for firms with higher disclosure costs and for firms with more relevant quarterly management earnings forecasts. Our results are robust to the use of multiple methods to address both endogeneity and the measurement error in firm-specific estimates of implied cost of equity capital.     

GAAP,GFS and AASB 1049: perceptions of public sector stakeholders

Efforts by Australian standard‐setters to harmonise public sector financial reporting resulted in AASB 1049, which sought to bridge the divide between generally accepted accounting principles (GAAP)‐based and government finance statistics (GFS)‐based financial statements. However, whether AASB 1049 has resulted in information that is considered appropriate for the public sector has not been examined. We explore this issue by comparing the requirements of AASB 1049 with the responses from a survey of public sector stakeholders on the appropriate accounting treatment and presentation of selected financial items. The analysis suggests consensus with AASB 1049 on presentation issues but less consensus on accounting treatments.     

Communicating quality: a unified model of disclosure and signalling

Firms communicate product quality to consumers through a variety of channels. Economic models of such communication take two alternative forms when quality is exogenous: (i) disclosure of quality through a credible direct claim; or (ii) signalling of quality via producer actions that influence buyers' beliefs about quality. In general, these two literatures have ignored one another. We argue that firms should be viewed as choosing which means of communication they will employ. We show that integration of these two alternatives leads to new implications about disclosure, signalling, firm preferences over type, and the social efficiency of the channel of communication employed.     

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.     

Escape from New York: The market impact of loosening disclosure requirements

We examine the first significant deregulation of U.S. disclosure requirements since the passage of the 1933/1934 Exchange and Securities Acts: the 2007 Securities and Exchange Commission (SEC) Rule 12h-6. Rule 12h-6 has made it easier for foreign firms to deregister with the SEC and thereby terminate their U.S. disclosure obligations. We show that the market reacted negatively to the announcement by the SEC that firms from countries with weak disclosure and governance regimes could more easily opt out of the stringent U.S. reporting and legal environment. We also find that since the rule's passage, an unprecedented number of firms have deregistered, and these firms often had been previous targets of U.S. class action securities lawsuits or SEC enforcement actions. Our findings suggest that shareholders of non-U.S firms place significant value on U.S. securities regulations, especially when the home country investor protections are weak.     

Mandatory CSR disclosure,monitoring and investment efficiency: evidence from China

This study investigates the effect of mandatory corporate social responsibility (CSR) disclosure on firms’ investment efficiency in China. Using the CSR regulation that mandates a group of listed firms to disclose stand‐alone CSR reports after 2008 as a natural experiment, we find that firms subject to the mandatory CSR regulation have decreased investment inefficiency subsequent to the mandate, especially in cases of overinvestment. This effect is more pronounced for firms with a control‐ownership wedge, state‐owned enterprises (SOEs), and firms having lower institutional ownership. Further analyses find that the reduction of overinvestment is much more significant in industries with high pollution and that the reduction in investment is not due to the CSR spending siphoning off capital used in other projects. We argue that mandatory corporate social responsibility disclosure improves monitoring over firms in China, especially when firms are characterised as having severe agency problems.     

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.     

The association between privatisation and voluntary disclosure: Evidence from Jordan

This paper investigates the impact of privatisation on the extent of corporate voluntary disclosure in Jordan.We conduct a longitudinal examination using 243 annual reports of 27 privatised firms in Jordan over a period of nine years from 1996 to 2004. Employing univariate and pooled regression models our results show that privatisation is positively associated with voluntary disclosure. Specifically, we find that accounting regulation reforms and foreign investments accompanying privatisation have a significant impact on the levels of accounting disclosure in Jordan. Our study provides evidence on the role of privatisation in improving the disclosure culture as an important pre‐condition for the development of active capital markets.