Switching to Semi-annual Financial Statement Reports - Market Reaction, Audit Fee and Corporate Governance Quality

Abstract

The aim of the research is to examine the reaction of market participants (investors and firms) to a regulatory exogenous shock of easing financial reporting statement regulations. Since 2017, small cap firms, publicly traded on Tel-Aviv stock exchange, are required to publish only Semi-annual reports hence any firm may opt to switch from formerly mandatory quarterly reporting to the currently required semi-annual financial reporting statement. We show that 2/3 of the firms chose to adopt the relief in regulation. In the group of firms that chose to apply the regulation relief, we find a significant negative abnormal market reaction of -2% to the announcement of adopting the relief. In the group of firms that waive the regulation relief and chose to stay on quarterly reporting, we observe a significant positive abnormal market reaction of +2.5% to the announcement of voluntary continuing with the quarterly financial reports. Moreover, for the firms that switch to semi-annual reports, we show a significant decrease of 19.8% in the number of external auditing hours and a significant decrease of 16% in the annual external total audit fee in 2017 as compared to 2016. No significant change in the annual external total audit fee has been observed for the firms that opted not to adopt the abovementioned regulation. We also collect additional information about institutional investor holdings and outside directors which serves on these boards (financial expertise, gender and "busyness") as signals to corporate governance quality. We find positive and significant associations between the voluntarily continue the quarterly financial reporting and high quality corporate governance. The findings of the event study provide a valuable contribution to the ongoing debate on the relevance of the quarterly financial reports to investors. The additional finding of lower corporate governance quality and decreased external audit effort which characterized the firms that adopt the relief represent an increased risk for information asymmetry for investors in such firms thus further reinforces the importance of frequent financial reporting.