Manage Separation/Termination Processes:
Firms tend to focus on voluntary disclosure of information of earnings disclosures, management forecasts, and to a lesser extent, overall disclosure levels.
Firms are likely to voluntarily include accounting information along with quarterly earnings announcements when current earnings are relatively less informative, or when future earnings are relatively more uncertain. This way, the information is likely to have a greater demand for additional value relevant information such as balance sheets to help assess firm’s value. These types of firms are likely to be
(1) In high technology industries;
(2) Reporting losses;
(3) With larger forecast errors;
(4) Engaging in mergers or acquisitions;
(5) That are younger; and
(6) With more volatile stock returns.
Dye (1985) argues that managers have incentives to make voluntary accounting disclosures when market participants find the disclosures useful in assessing firm value. Investors find voluntary balance sheet disclosures relatively more useful in assessing firm value when current earnings are less informative, or when future earnings are more uncertain. They are likely to demand additional value relevant disclosures to supplement the information contained in earnings. Similarly, because future earnings are more uncertain among ﬁrms whose operations are less predictable (such as younger firms), investors are more likely to demand additional disclosures when they evaluate younger ﬁrms (Lang, 1991)
High-tech ﬁrms operate in rapidly changing environments that make their future operations, and hence future earnings, relatively more uncertain. While balance sheet information is also problematic in valuing intangibles and in resolving future uncertainty, analysts find various accounting information particularly useful in valuing high technology companies. For example, cash balances are important in assessing the ability of high technology companies to enter new markets, to make new product launches, and to survive until the next round of ﬁnancing. Similarly, inventory and receivables management is particularly critical for these ﬁrms due to the uncertainty of their operating environment and the untried nature of their products and customer base (Palazzo, 1999; Ramstad, 1996).
Firms are likely to disclose their accounting information when they report losses. In the presence of a loss, earnings fail in their primary role as an indicator of future earnings (Collins et al., 1997). Moreover, because losses cannot be sustained indefinitely, firms experiencing losses are more likely to liquidate, making their abandonment value more relevant in assessing shareholder value.
Accounting information disclosed is likely to be useful in interpreting the valuation implications of earnings when reported earnings differ from market expectations. The firm’s managers are likely to guide market participants in understanding why earnings diverge from expectations, as well as the valuation implications of the divergence. Balance sheet disclosures can provide this guidance because balance sheet accounts can be useful in interpreting reported earnings (McGough and Podd, 1999). For example, working capital accounts provide investors with value relevant information about the nature of reported accruals.
Firms with quarterly earnings that deviate from analysts’ forecasts are more likely to disclose balance sheet information in their quarterly earnings announcements.
Firms that engage in mergers or acquisitions during the quarter are likely to disclose balance sheet information in their quarterly earnings announcements. Investors are likely to have a relatively greater demand for balance sheet information when firms engage in merger and acquisition activity. Mergers and acquisitions are likely impact the ﬁrms’ future operating activities, which in turn are likely to increase the uncertainty related to their future earnings. Accounting disclosure will help the investors assess the impact of the merger and acquisition activity on future earnings. For example, the total asset number can be used to predict the normal component of future earnings (Ohlson, 1995).
Younger ﬁrms are more likely to disclose accounting information in their quarterly earnings announcements. This impacts the demand for value relevant information is the ﬁrm’s age. Lang (1991) argues that ﬁrms with greater uncertainty about future earnings such as younger ﬁrms are likely to reap greater beneﬁts from additional disclosure.
Firms with more volatile stock returns are likely to disclose information in their quarterly earnings announcements. Stock return volatility is also likely to be associated with accounting disclosures. High stock return volatility is consistent with greater uncertainty about future earnings, because stock price is a function of expected future earnings. Since investors are likely to have a greater demand for information when future earnings are more uncertain, we expect that ﬁrms have greater incentives to voluntarily disclose additional value relevant information.
Verrecchia (1983) analyzes voluntary disclosure in the context of accounting information and argues that full voluntary disclosure will not always occur. He demonstrates that when private information disclosure results in proprietary costs, the market is likely to interpret non-disclosure with less suspicion because the costs of disclosure can exceed the beneﬁts to shareholders when proprietary costs are sufficiently large. This suggests that consideration of proprietary costs may reduce management incentives to make voluntary balance sheet disclosures.
However, Verrecchia (1983) also observes that management decisions to make accounting disclosures are typically not decisions of disclosure versus non-disclosure, but rather decisions of accelerated versus delayed disclosure.
If the balance sheet disclosure ﬁrms’ earnings are relatively less value-relevant, we expect the relation between earnings and price to be relatively weaker for these ﬁrms, providing them with an incentive to supplement their earnings announcements with balance sheet disclosures.
Voluntary accounting information disclosures are being motivated by investor demand for additional value relevant information to supplement reported earnings. Usefulness of accounting information in valuing securities by identifying the circumstances under which market participants are likely to demand, and firms are likely to provide, voluntary balance sheet disclosures.
Each company is unique
A one-size-fit-all accounting standard approach will not work for all companies’ disclosure demands
Accounting standards can just rule all companies to disclose some common owned information – cash, liabilities, amount of expenses, etc.
Collins, D.W., Maydew, E.L.,& Weiss, I.S., (1997). Changes in the value relevance of earnings and book values over the past forty years. Journal of Accounting and Economics 24.
Dye, R., 1985. Disclosure of nonproprietary information. Journal of Accounting Research 23,
Lang, M.H., 1991. Time-varying stock price response to earnings induced by uncertainty about the time- series process of earnings. Journal of Accounting Research 29.
Lang, M.H., Lundholm, R.J., 1996. Corporate disclosure policy and analyst behavior. The Accounting Review 71.
McGough, R., 2000. Lucent’s mission is to regain trust of wary investors. The Wall Street Journal
Ohlson, J., 1995. Earnings, book values, and dividends in security valuation. Contemporary Accounting
Palazzo, A., 1999. Datron weathers transition to new markets. The Wall Street Journal (June 30). Ramstad, E, 1996.
Verrecchia, R., 1983. Discretionary disclosure. Journal of Accounting and Economics 12.