Do Note Disclosures Influence Value-Relevance More When Managers Lose Financial Statement Placement Discretion? Evidence From ASU 2011–05

Abstract

We examine whether financial statement note disclosures play an enhanced role in value relevance when the placement of line items among financial statements becomes more standardized and prominent. Specifically, we consider the setting of ASU 2011-05, which removed the option for firms to report other comprehensive income (OCI) in the statement of changes in stockholders’ equity. We report two main findings. First, using a larger sample and longer time period than early studies examining ASU 2011-05, we document that, relative to firms that were unaffected by the OCI reporting mandate, firms that changed OCI placement away from the statement of changes in stockholders’ equity exhibited greater increases in OCI value relevance after ASU 2011-05 became effective, in line with the FASB’s stated goal of raising the prominence of items reported in OCI. Our findings contradict the seemingly puzzling findings of early studies, which documented an incremental decrease in OCI value relevance for these firms. Second, we find that this incremental positive effect for firms that changed OCI placement is enhanced when OCI-related note disclosures are more specific, contain more numerical information, are more readable, are more stable from year to year, or are shorter in length. Collectively, our findings suggest that financial statement placement and note disclosure characteristics interact in a manner such that when financial statement line items influence valuation to a greater extent through more prominent placement, the qualitative characteristics of accompanying note disclosures tend to assume this role more prominently as well.