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This thesis is comprised of two essays that explore how investors' uncertainty over financial reporting quality influences firms' voluntary disclosures. I consider two shocks that cause investors to assign a higher likelihood of restatement and examine how managers respond using voluntary disclosures. Managers inform stakeholders of the firm through mandatory disclosures (e.g. financial statements) and voluntary disclosures (e.g. earnings forecasts, conference calls, press releases). Financial reporting quality represents the extent to which financial statements faithfully reflect the underlying economics of the firm, and therefore, how much stakeholders can learn from these mandatory disclosures alone. The focus of this thesis is on how managers use voluntary channels to inform stakeholders following shocks to investors' expectations of financial reporting quality.
This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.
The importance of an effective corporate communication with all stakeholders including shareholders has been extensively debated in the business literature in the aftermath of 2007-2009 global financial crisis. The key indicator of business value have shifted from accounting profits and stock market performance, formerly, to firm reputation and sustainability performance, currently. Therefore, the transparency and value-relevance of conventional financial reporting has been questioned in terms of its capability to satisfy increasing information needs of all stakeholders. Many doubt whether those traditional financial metrics derived from financial statements can appropriately capture firm & rsquo;s long-term value creation ability. In recent years, users of corporate reports are demanding more relevant financial and non-financial on key performance indicators and forward looking information above and beyond conventional financial statements. To satisfy the demands of information users and decision makers, companies are expected to not only increase their reporting transparency in conventional financial statements but also disclose more inside information to outside public through different types of voluntary disclosure. The first dissertation investigates the role of sustainability report through examining the associations among voluntary disclosure, earnings quality and audit fee. Recently more and more firms begin to release sustainability reports, one important channel of voluntary disclosure, to satisfy the needs of information users and increase the transparency of financial reporting. In this paper, I especially examine the effect of voluntary disclosure quality on those associations. Through Difference-in-Difference test, I find that the release of sustainability report is positively correlated with innate earnings quality and negatively correlated with discretionary earnings quality. Moreover, the positive (negative) correlation between sustainability report and innate (discretionary) earnings quality is more (less) pronounced when the voluntary disclosure quality is high. I also find that the release of sustainability report is associated with higher audit fees and thus it suggests that the sustainability report cannot substitute the traditional financial statement. My conclusions are robust through additional tests of OLS regressions. This paper has important political, academic and industry application. The second dissertation investigates how the firm & rsquo;s cost stickiness strategy is associated with the firm & rsquo;s management earnings forecast (MEF). I conjecture that the managerial incentive regarding the cost strategy and voluntary disclosure strategy are interdependent. When managers choose their cost management, they will also choose the corresponding management earnings forecast strategy to align their interests. Through the empirical tests with a sample between year 2005 and 2011, I find that the firm & rsquo;s level of sticky cost is positively associated with the firm & rsquo;s propensity to issue MEF and the frequency of MEF. Moreover, I find that the firm & rsquo;s level of sticky cost is associated with more good earnings news forecasted by managers. Finally, I find that the relation between cost stickiness and MEF behaviors is more pronounced when the MEF is long-horizon oriented and when the firm efficiency is high. My research builds a link between financial accounting information and managerial accounting information, and also provides new evidence to understand the managerial incentives behind each strategy chosen by managers. This third dissertation investigates how industry peer firms tend to influence the specific firm & rsquo;s voluntary disclosure strategy. Through examining the empirical example of management earnings forecast between 2005 and 2011 and implementing the 2SLS regressions, I find that the specific firm & rsquo;s disclosure frequency, disclosure horizon and the disclosure of bad news are significantly influenced by its peers firms & rsquo; disclosure behaviors. Specifically, the increase in the peers & rsquo; disclosure frequency, disclosure horizon and disclosure of bad news tend to encourage the specific firm to increase its disclosure frequency, disclosure horizon and disclosure of bad news. Moreover, certain firms (such as firms with S & P credit rating, higher profit, larger size or higher market-to-book ratio) tend to be more sensitive to their peer firms & rsquo; voluntary disclosure strategy. Finally, I find that the specific leader-follower relation doesn & rsquo;t exist in the peer effects of disclosure strategy and thus the signaling theory, litigation risk and CEO reputation are more major reasons than herding theory and free rider theory in explaining this phenomenon.
Globalization and the accompanying investment facilities available have resulted in rapid popularity for international financial reporting standards (IFRS). However, differences often exist in terms of what firms report, and once inconsistency between tax regulations and financial reporting regulations occur, differences between taxable and accounting practices are inevitable. This book introduces a new approach to corporate financial reporting by investigating goal incongruence (GING) in the context of the principal and agent (PA) setting. The authors argue that improving the method for the disclosure of information would not only increase the quality of corporate financial information and reporting but also reduce the possibility of any GING arising. This book presents the financial implications of international accounting and financial reporting standards (IAS and IFRS), presenting numerous real-life situations, cases, examples and implications to reveal how GING might influence the implementation of corporate financial reporting of profit volumes and sizes, which are the leading drivers of and widely accepted proxies for corporate financial performance.
The increasingly crucial role of companies’ non-financial disclosure (NFD) and integrated reporting (IR) has led to a lively debate among academics, practitioners, and regulators on the approaches, framework, contents, principles, and standards that should oversee these forms of reporting. Through several expert contributions, conducted both with qualitative and quantitative methodologies, this book provides an up-to-date portrait of the debate by exploring corporate NFD either in its mandated contents or voluntary information. Contributing authors provide studies that encompass the different lines of NFD, namely non-financial risk reporting, sustainability reporting, and intellectual capital reporting, as well as the integration of financial and non-financial information through IR, the assurance of the NFD and IR through auditing activities, and the role of management and CFOs in NFD and IR.
For researchers and managers interested in performance measurement, this volume includes innovative research that sheds light on topics such as the determinants of disclosure quality, the identification of appropriate metrics, the relationship among the different disclosure mechanisms and between voluntary and mandatory disclosure, and many more.
This study examines the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) on voluntary disclosure. Using a difference-in-differences analysis, we document a significant increase in the likelihood and frequency of management earnings forecasts following mandatory IFRS adoption, consistent with the notion that IFRS adoption alters firms' disclosure incentives in response to increased capital-market demand. We find the increase to be larger among firms domiciled in code-law countries, suggesting a catching-up effect among firms facing low disclosure incentives pre-adoption. We then propose and test three channels through which IFRS adoption could alter firms' disclosure incentives: improved earnings quality, increased shareholder demand, and increased analyst demand. We find evidence consistent with all three channels.The paper "Mandatory Financial Reporting and Voluntary Disclosure: The Effect of Mandatory IFRS Adoption on Management Forecasts" may be found here: 'http://ssrn.com/abstract=2766981' http://ssrn.com/abstract=2766981.
This book is a timely addition to the fast-growing international debate on Integrated Reporting, which offers a holistic view of the evolution and practice of Integrated Reporting. The book covers the determinants and consequences of Integrated Reporting, as well as examining some of the most relevant issues (particularly in the context of the United States) in the debate about Integrated Reporting.
Master's Thesis from the year 2012 in the subject Economics - Finance, grade: 5.5, University of Zurich (Department of Banking and Finance), course: Economics and Finance, language: English, abstract: Does voluntary disclosure quality pay off? And if so, what are the driving forces behind the relationship of voluntary disclosure quality and the cost of equity capital? This study addresses these and other questions in the context of analyzing the determinants of the cost of equity capital for Swiss firms. The relation between voluntary disclosure quality and cost of equity capital is widely known to be affected by self-selection. Potential endogeneity bias is controlled for by adopting a two-stage least squares approach in a cross-sectional setting. Voluntary disclosure quality is proxied by the annual reports disclosure scores for a well-diversified sample of Swiss firms as developed by the Department of Banking and Finance of the University of Zurich. Further, an ex-ante cost of capital metric derived from the dividend discount model is used in this study. Empirical evidence shows that the association between voluntary disclosure quality and cost of equity differs with a firm's stock listing history. While the relation is predicted to be negative for firms at the IPO stage, it is likely reversed at some point in a firm's stock listing history. These results suggest that analysts' information processing activities negatively moderate the impact of voluntary disclosure quality on firm value. Importantly, the predicted interaction between voluntary disclosure quality and stock listing history remains significant when adjusting for endogeneity.