The corporate information environment develops endogenously as a consequence of information asymmetries and agency problems between investors, entrepreneurs, and managers. We provide a framework for analyzing the three main decisions that shape the corporate information environment in a capital markets setting: (1) managers’ voluntary reporting and disclosure decisions, (2) reporting and disclosures mandated by regulators, and (3) reporting decisions by third-party intermediaries (analysts). We review current research on disclosure regulation, information intermediaries, and the determinants and economic consequences of corporate disclosure and financial reporting decisions. We conclude that in the last ten years, research has generated a number of useful insights. Despite this progress, we call for researchers to consider interdependencies between the various decisions that shape the corporate information environment and highlight changes in the economic financial environment that raise new and interesting issues for researchers to address.

The Financial Reporting Environment: Review of the Recent Literature

We define higher audit quality as greater assurance of high financial reporting quality. Researchers use many proxies for audit quality, with little guidance on choosing among them. We provide a framework for systematically evaluating their unique strengths and weaknesses. Because it is inextricably intertwined with financial reporting quality, audit quality also depends on firms’ innate characteristics and financial reporting systems. Our review of the models commonly used to disentangle these constructs suggests the need for better conceptual guidance. Finally, we urge more research on the role of auditor and client competency in driving audit quality.

A Review of Archival Auditing Research

The financial reporting environment: Review of the recent literature

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A review of archival auditing research

We review research from the 1990s that examines the determinants and consequences of accounting choice, structuring our analysis around the three types of market imperfections that influence managers? choices: agency costs, information asymmetries, and externalities affecting noncontracting parties. We conclude that research in the 1990s made limited progress in expanding our understanding of accounting choice because of limitations in research design and a focus on replication rather than extension of current knowledge. We discuss opportunities for future research, recommending the exploration of the economic implications of accounting choice by addressing the three different reasons why accounting matters.

Empirical Research on Accounting Choice

We investigate the relation between dividend changes and future profitability, measured in terms of either future earnings or future abnormal earnings. Supporting "the information content of dividends hypothesis," we find that dividend changes provide information about the level of profitability in subsequent years, incremental to market and accounting data. We also document that dividend changes are positively related to earnings changes in each of the two years after the dividend change. It is well documented that dividend changes are positively associated with stock returns in the days surrounding the dividend change announcement (see, e.g., Aharony and Swary (1980), Asquith and Mullins (1983), Kalay and Loewenstein (1985), and Petit (1972)). According to "the information content of dividends hypothesis" (Miller and Modigliani (1961)), dividend changes trigger stock returns because they convey new information about the firm's future profitability. However, recent studies have not supported this hypothesized relation between dividend changes and future earnings (e.g., DeAngelo, DeAngelo, and Skinner (1996), Benartzi, Michaely, and Thaler (BMT, 1997)). We reexamine the relation between dividend changes and alternative measures of future profitability, and provide strong evidence that dividend changes are positively related to future earnings changes, future earnings, and future abnormal earnings. To investigate whether dividend changes convey new information about future profitability, one has to estimate expected profitability. Most prior studies assume that earnings follow a random walk with drift, and measure unexpected profitability as the realized change in earnings minus the estimated drift. They then examine the association between dividend changes and unexpected earnings. We first use a similar approach and find, like prior studies, that dividend changes are not positively related to future earnings changes. We then modify the regression model to address two specifi

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Dividend Changes and Future Profitability

While empirical evidence alludes to the intertemporal nature of corporate voluntary disclosures, most of the existing theory analyzes firms' voluntary disclosure decisions within single-period settings. Introducing a repeated, multiperiod, disclosure setting, we study the extent to which firms' strategic disclosure behavior in the past affects their prosperity to provide voluntary disclosures in the future. Our analysis demonstrates that by voluntarily disclosing private information firms make an implicit commitment to provide similar disclosures in the future, and therefore are less willing to voluntarily disclose information in the first place. This effect is expected to be of larger magnitude for firms (1) with a long history of absence of voluntary disclosures and an impressive past operating performance, or (2) that operate in a relatively stable and predictable business and information environment, or (3) whose managers have a long time horizon and a high degree of risk aversion.

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Intertemporal Dynamics of Corporate Voluntary Disclosures

While under some circumstances information sharing in oligopoly may be beneficial, the literature ignores the possibility of strategic information sharing by assuming verifiability of data. I endogenize the incentives for truthful information sharing and prove that if firms have the ability to send misleading information, they will always do. To overcome this problem I introduce a (costly) mechanism through which the firm will, in its own best interest, reveal the true value of its private information, even though outside verification is impossible. I show that in some cases benefits from information sharing exceed the signalling costs, while in other cases the reverse is true. The fact that I model a two-sided signalling enables me to mitigate the signalling-cost problem. Rather than burning money, oligopolistic rivals may exchange transfer payments, thereby significantly reducing signalling costs.

Information Sharing in Oligopoly: The Truth-Telling Problem

Recognition, Disclosure, or Delay: Timing the Adoption of SFAS No. 106

In this study we investigate the relation between dividend changes and future profitability. We find that dividend changes are positively associated with future profitability after controlling for (i) past profitability, (ii) the effect of invested equity capital on past, current and future profitability, and (iii) market expectations of future profitability prior to the dividend change. The relation between dividend increases and future profitability remains highly significant even after controlling for profitability in the dividend change year. Moreover, the magnitude of the relation between dividend changes and unexpected future profitability increases in the distance between the dividend change year and the future year. Finally, similar to previous studies, we document that dividend changes are positively associated with subsequent capital expenditures. These results suggest that dividend increase announcements convey that (i) current profitability will be higher than expected, (ii) the shock to current profitability is relatively permanent, and (iii) the company expects to invest in positive NPV projects that will generate accounting profits in future years.

Amir Ziv

Papers

Dividend Changes and Future Profitability

Intertemporal Dynamics of Corporate Voluntary Disclosures

Information Sharing in Oligopoly: The Truth-Telling Problem

Recognition, Disclosure, or Delay: Timing the Adoption of SFAS No. 106

Dividend Changes and Future Profitability