Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the United States is that, under current U.S. reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (1AS or U.S. GAAP), thereby committing themselves to increased levels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firmsnamely, the bid-ask spread and trading volume-behave in the predicted direction compared to firms employing the German reporting regime.

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The Economic Consequences of Increased Disclosure

Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.

/pdf/understanding-earnings-quality-a-review-of-the-proxies-their-1r9rjtuq8l.pdf

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1004&context=accounting_papers

What makes organizations so similar? We contend that the engine of rationalization and bureaucratization has moved from the competitive marketplace to the state and the professions. Once a set of organizations emerges as a field, a paradox arises: rational actors make their organizations increasingly similar as they try to change them. We describe three isomorphic processes-coercive, mimetic, and normative—leading to this outcome. We then specify hypotheses about the impact of resource centralization and dependency, goal ambiguity and technical uncertainty, and professionalization and structuration on isomorphic change. Finally, we suggest implications for theories of organizations and social change.

The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields (Chinese Translation)

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

This paper provides evidence on the characteristics of firms that include “pro forma” earnings information in their press releases, whether the usefulness of pro forma earnings to investors varies systematically with these characteristics, and whether the investor response to pro forma earnings is consistent with market efficiency or mispricing. Using a sample of 249 press releases from 1997–99, we find that firms with low GAAP earnings informativeness are more likely to disclose pro forma earnings than other firms. We also find that strategic considerations, measured using the direction of GAAP earnings surprises, are an important determinant of pro forma reporting. In addition, our examination of the relative and incremental information content of pro forma earnings shows that investors find pro forma earnings to be more useful when GAAP earnings informativeness is low or when strategic considerations are absent. Tests of the predictive ability of pro forma earnings for future profitability and returns ...

Earnings Informativeness and Strategic Disclosure: An Empirical Examination of “Pro Forma” Earnings

This paper explores the use of specific accruals in managing earnings. We argue that the costs of managing earnings through different income statement items vary and that the benefits of earnings management through each of these items are context-dependent. We thus make differential predictions regarding which specific accrual will be used to manage earnings in each of three contexts. To measure earnings management using specific accruals, we develop six performance-matched measures. Consistent with our predictions, we find that firms issuing equity appear to prefer to manage earnings upward by accelerating revenue recognition, while the opposite is true for firms in the management buyout context. For firms trying to avoid reporting an earnings decrease, we find that special items are significantly more positive. This paper improves our understanding of how the incentives behind earnings management affect the method used to achieve earnings goals and also illustrates the usefulness of examining specific accruals in different contexts.

How are Earnings Managed? An Examination of Specific Accruals

The release of the full set of financial statements in Form 10–Q provides investors with the data necessary to estimate the discretionary portion of earnings, thereby allowing them to better assess the integrity of reported quarterly earnings. We thus expect a negative association between unexpected discretionary accruals estimated using 10–Q disclosures and stock returns around 10–Q filing dates. Consistent with our expectations, we document a negative association between unexpected discretionary accruals and cumulative abnormal returns over a short window around the 10–Q filing date. Furthermore, this association varies systematically with investor sophistication. Finally, results from portfolio tests indicate that this association is economically as well as statistically significant. One interpretation of our findings is that accruals management has substantial valuation consequences, which are quickly impounded into stock prices.

Accruals Management, Investor Sophistication, and Equity Valuation: Evidence from 10–Q Filings

There is relatively little evidence on the specific accruals used to manage earnings. This paper examines this issue by considering the use of specific accruals in three earnings-management contexts: equity offerings, management buyouts, and firms avoiding earnings decreases. We argue that the costs of managing earnings through different income statement items vary and that the benefits of earnings management through each of these items depend on the context. We thus make differential predictions regarding which specific accrual will be used to manage earnings in each of the three contexts we consider. To measure earnings management for specific accruals, we develop performance-matched measures to capture the unexpected component of accounts receivable, inventory, accounts payable, accrued liabilities, depreciation expense, and special items. Consistent with our predictions, we find that firms issuing equity appear to prefer managing earnings upward by accelerating revenue recognition. Specifically, we find that accounts receivable for these firms are unexpectedly high. Conversely, for the management buyout context, we predict and find unexpected accounts receivable to be negative. For firms trying to avoid reporting an earnings decrease, we expect firms to be less concerned with earnings persistence and therefore more likely to use more transitory, and less costly, items to achieve their goal. We find that special items are significantly more positive for this group. This paper provides a further step toward understanding how the incentives behind earnings management affect the method used to achieve earnings goals, and it illustrates the usefulness of examining individual accruals in specific contexts.

How Are Earnings Managed? An Examination of Specific Accruals

We empirically examine the effects of intensified scrutiny over non-GAAP reporting on the quality of non-GAAP earnings exclusions. We find that, on average, exclusions are of higher quality (i.e., more transitory) following intervention by the Securities and Exchange Commission (SEC) into non-GAAP reporting. We further find that firms that stopped releasing non-GAAP earnings numbers after the SEC intervention had lower quality exclusions in the pre-intervention period. These results are consistent with the SEC's objectives of improving the quality of non-GAAP earnings figures. However, when we decompose total exclusions into special items and other exclusions, we find evidence that the quality of special items has decreased in the post-intervention period, which suggests that managers adapted to the new disclosure environment by shifting more recurring expenses into special items. This suggests that there may be unintended consequences arising from the heightened scrutiny over non-GAAP reporting.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID955496_code333097.pdf?abstractid=954768&mirid=5

Carol A. Marquardt

Papers

Earnings Informativeness and Strategic Disclosure: An Empirical Examination of “Pro Forma” Earnings

How are Earnings Managed? An Examination of Specific Accruals

Accruals Management, Investor Sophistication, and Equity Valuation: Evidence from 10–Q Filings

How Are Earnings Managed? An Examination of Specific Accruals

Sec Scrutiny and the Evolution of Non-Gaap Reporting