The Dark Side of Low Financial Reporting Frequency: Investors' Reliance on Alternative Sources of Earnings News and Excessive Information Spillovers

2020 ◽  
Vol 95 (6) ◽  
pp. 23-49 ◽  
Author(s):  
Salman Arif ◽  
Emmanuel T. De George
Keyword(s):  
Financial Reporting ◽  
Trading Volume ◽  
Price Volatility ◽  
Data Availability ◽  
Dark Side ◽  
Earnings Announcement ◽  
Earnings Information ◽  
Alternative Sources ◽  
Annual Earnings ◽  
Reporting Frequency

ABSTRACT This paper examines how low financial reporting frequency affects investors' reliance on alternative sources of earnings information. We find that the returns of semi-annual earnings announcers (i.e., low reporting frequency stocks [LRF]) are almost twice as sensitive to the earnings announcement returns of U.S. industry bellwether peers for non-reporting periods compared to reporting periods. Strikingly, these heightened spillovers are followed by return reversals when investors finally observe own-firm earnings at the subsequent semi-annual earnings announcement. This indicates that investors periodically overreact to peer-firm earnings news in the absence of own-firm earnings disclosures in interim periods. We also find elevated price volatility and trading volume around earnings announcements for non-reporting periods, consistent with theories of investor overconfidence. Collectively, our results suggest that investors are unable to successfully offset the information loss arising from low reporting frequency, thus impairing their ability to value firms and adversely affecting the quality of financial markets. JEL Classifications: M41; M48; G14. Data Availability: Data are available from the public sources cited in the text.

Interim Reporting Frequency and the Mispricing of Accruals

2018 ◽  
Vol 32 (3) ◽  
pp. 29-47
Author(s):  
Shou-Min Tsao ◽  
Hsueh-Tien Lu ◽  
Edmund C. Keung
Keyword(s):  
Financial Reporting ◽  
Stock Prices ◽  
Data Availability ◽  
Financial Reports ◽  
Regulatory Changes ◽  
Sample Composition ◽  
Reporting Frequency ◽  
Over Time ◽  
Jel Classifications ◽  
Accrual Mispricing

SYNOPSIS This study examines the association between mandatory financial reporting frequency and the accrual anomaly. Based on regulatory changes in reporting frequency requirements in Taiwan, we divide our sample period into three reporting regimes: a semiannual reporting regime from 1982 to 1985, a quarterly reporting regime from 1986 to 1987, and a monthly reporting regime (both quarterly financial reports and monthly revenue disclosure) from 1988 to 1993. We find that although both switches (from the semiannual reporting regime to the quarterly reporting regime and from the quarterly reporting regime to the monthly reporting regime) hasten the dissemination of the information contained in annual accruals into stock prices and reduce annual accrual mispricing, the switch to monthly reporting has a lesser effect. Our results are robust to controlling for risk factors, transaction costs, and potential changes in accrual, cash flow persistence, and sample composition over time. These results imply that more frequent reporting is one possible mechanism to reduce accrual mispricing. JEL Classifications: G14; L51; M41; M48. Data Availability: Data are available from sources identified in the paper.

Do Auditors Recognize the Potential Dark Side of Executives' Accounting Competence?

2018 ◽  
Vol 93 (6) ◽  
pp. 1-28 ◽  
Author(s):  
Anne Albrecht ◽  
Elaine G. Mauldin ◽  
Nathan J. Newton
Keyword(s):  
Financial Reporting ◽  
Prior Experience ◽  
Financial Statements ◽  
Audit Fees ◽  
Data Availability ◽  
Dark Side ◽  
Audit Fee ◽  
Aggressive Attitude ◽  
Jel Classifications

ABSTRACT Practice and research recognize the importance of extensive knowledge of accounting and financial reporting experience for generating reliable financial statements. However, we consider the possibility that such knowledge and experience increase the likelihood of material misstatement when executives have incentives to misreport. We use executives' prior experience as an audit manager or partner as a measure of extensive accounting and financial reporting competence. We find that the interaction of this measure and compensation-based incentives increases the likelihood of misstatements. Further, auditors discount the audit fee premium associated with compensation-based incentives when executives have accounting competence. Together, our results suggest that a dark side of accounting competence emerges in the presence of certain incentives, but auditors view accounting competence favorably despite the heightened risk. In further analyses, we demonstrate that executives' aggressive attitude toward reporting exacerbates the effect of accounting competence and compensation-based incentives on misstatements, but not on audit fees. JEL Classifications: M41; M42. Data Availability: Data are available from public sources identified in the text.

Do Companies With Effective Internal Controls Over Financial Reporting Benefit From Sarbanes–Oxley Sections 302 and 404?

2016 ◽  
Vol 33 (2) ◽  
pp. 200-227 ◽  
Author(s):  
Parveen P. Gupta ◽  
Heibatollah Sami ◽  
Haiyan Zhou
Keyword(s):  
Information Asymmetry ◽  
Financial Reporting ◽  
Capital Markets ◽  
Internal Control ◽  
Trading Volume ◽  
Price Volatility ◽  
Sarbanes Oxley ◽  
Section 302 ◽  
The Impact ◽  
Bid Ask Spreads

Post-SOX (Sarbanes–Oxley Act) academic research on internal control focuses on the characteristics of publicly listed companies disclosing material control weaknesses or the consequences experienced by these companies. However, to date, limited research has empirically examined whether these new disclosures truly enhance “public interest” by promoting “equity” in the capital markets through enhanced information distribution. In this article, we empirically investigate the impact these disclosures have on information asymmetry and related market micro-structure. We hypothesize that both the management’s and the auditor’s reporting on internal control provide outside investors additional and higher quality information about a firm’s future prospects, thereby reducing the information asymmetry in capital markets. Such reduction in information asymmetry should be reflected in decreased bid-ask spreads and price volatility, as well as increased trading volume. Our cross-sectional analyses show that, subsequent to the management’s report on internal control per Section 302, the information environment improves for U.S. firms as manifested by decreased bid-ask spread and price volatility, and increased trading volume. However, we find no similar results subsequent to the auditors’ reporting on a company’s internal control over financial reporting. In our time-series intervention analyses, about 70% of sample firms have experienced significant and permanent reductions in their bid-ask spreads subsequent to the implementation of Section 302 of SOX, in contrast to only 30% of firms subsequent to the implementation of Section 404 of SOX. Our findings point to the public policy issue of whether financial reporting quality of public companies can be improved at a lower cost.

scholarly journals Effects of Increased Reporting Frequency on Nonprofessional Investors' Earnings Predictions

2011 ◽  
Vol 24 (1) ◽  
pp. 91-107 ◽  
Author(s):  
Terence J. Pitre
Keyword(s):  
Decision Making ◽  
Financial Reporting ◽  
Historical Data ◽  
Seasonal Pattern ◽  
Data Availability ◽  
Financial Reports ◽  
Nonprofessional Investors ◽  
Recency Effects ◽  
Primacy Effects ◽  
Reporting Frequency

ABSTRACT More frequent financial reporting has been a topic of debate for many years. However, little evidence exists about the possible effects of more frequent reporting on investors' decision making. Using a between-subjects experiment, this study analyzes how altering the timing or frequency of earnings reports—weekly, as opposed to quarterly, reports—affects the accuracy and dispersion of earnings predictions by nonprofessional investors. This is important, since regulators have identified nonprofessionals as a significant audience for financial reports. I hypothesize and find that more frequent reporting results in less accurate predictions and greater variance, particularly when a strong seasonal pattern exists. Finally, investors in the more-frequent reporting condition self-reported that they were more influenced by older historical data—suggesting primacy effects—while those in the less-frequent reporting condition self-reported that they were more influenced by the newer historical data, suggesting recency effects. Data Availability: Data are available from the author on request.

The Impact of Audit Completeness and Quality on Earnings Announcement GAAP Disclosures

2015 ◽  
Vol 91 (2) ◽  
pp. 677-705 ◽  
Author(s):  
Joseph H. Schroeder
Keyword(s):  
Detailed Balance ◽  
Balance Sheet ◽  
Data Availability ◽  
Financial Statement ◽  
Public Companies ◽  
Earnings Announcement ◽  
Recent Trends ◽  
Annual Earnings ◽  
The Impact

ABSTRACT This study examines the role of the external audit in management's decision about the amount of GAAP financial statement information to disclose in the annual earnings announcement. The earnings announcement is a key disclosure provided by public companies. Yet, there is no requirement that earnings announcements contain audited GAAP numbers; in fact, recent trends indicate that a majority of companies release earnings before the completion of year-end audit fieldwork. I predict and find that companies that wait until the audit is more complete at the earnings announcement date and receive higher quality audits provide more detailed balance sheet, cash flow statement, and overall GAAP disclosures. I also provide evidence that complete audits and higher quality audits impact the information content of the earnings announcement. The combined results indicate that audit completeness and quality help facilitate more detailed earnings announcement disclosures and have implications for the equity market. Data Availability: Data are publicly available from sources identified in the text.

Comparing Non-GAAP EPS in Earnings Announcements and Proxy Statements

2021 ◽  
Author(s):  
Dirk E. Black ◽  
Ervin L. Black ◽  
Theodore E. Christensen ◽  
Kurt H. Gee
Keyword(s):  
Financial Reporting ◽  
Capital Market ◽  
Firm Value ◽  
Earnings Announcements ◽  
Securities And Exchange Commission ◽  
Earnings Announcement ◽  
Market Incentives ◽  
Earnings Per Share ◽  
Earnings Components ◽  
Annual Earnings

We compare non-GAAP earnings per share (EPS) in firms’ annual earnings announcements and proxy statements using hand-collected data from U.S. Securities and Exchange Commission filings. We find that proxies for capital market incentives (contracting incentives) are more highly associated with firms’ disclosure of non-GAAP EPS in annual earnings announcements (proxy statements). However, we find systematic differences in the properties of firms’ non-GAAP earnings and exclusions depending on whether they disclose non-GAAP EPS in both the earnings announcement and the proxy statement. When firms disclose non-GAAP EPS in both documents, we find that non-GAAP EPS is more useful for assessing firm value. Specifically, these firms are more likely to: (1) exclude nonrecurring items, (2) exclude less persistent earnings components, and (3) provide less aggressive non-GAAP EPS. Our results suggest that non-GAAP EPS is higher in quality for investors when disclosed in both the annual earnings announcement and the proxy statement. We provide some of the first large-sample evidence consistent with the use of non-GAAP EPS metrics in both financial reporting and compensation contracting. This paper was accepted by Brian Bushee, accounting.

Releasing Earnings when the Audit is Less Complete: Implications for Audit Quality and the Auditor/Client Relationship

2021 ◽  
Author(s):  
Scott N. Bronson ◽  
Adi Masli ◽  
Joseph H. Schroeder
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Financial Statement ◽  
Earnings Announcement ◽  
Client Retention ◽  
Announcement Date ◽  
Client Relationship ◽  
Retention Decisions ◽  
Annual Earnings

This study examines the effect of audit completeness at the annual earnings announcement date on audit quality and auditor/client retention decisions. The vast majority of companies now release earnings before the year-end audit is complete while, historically, companies would release earnings on or after the date of audit completion. Management's decision to release earnings when the audit is less complete can adversely impact audit quality and has negative implications for the overall auditor/client dynamic. We find that audits that are less complete at the earnings announcement date are associated with a higher likelihood of financial statement misstatements in audit areas that are typically performed towards the end of audit fieldwork. We also find a higher likelihood of auditor turnover during the following year. Taken together, the results suggest lower financial reporting/audit quality and higher auditor turnover for companies that release earnings when the audit is less complete.

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