Voluntary disclosure and earnings management: evidence from the Brazilian capital market

Silvia Consoni,Gerlando Augusto Sampaio Franco De Lima,Romualdo Douglas Colauto

doi:10.1590/1808-057x201703360

Silvia Consoni, Gerlando Augusto Sampaio Franco De Lima + Show 1 more

Open Access

https://doi.org/10.1590/1808-057x201703360

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Abstract

ABSTRACT This study examines the association between the voluntary disclosure of economic and financial information and earnings management. The outlined arguments on the subject are based on the assumption that consistent voluntary disclosure policies may reduce earnings management. The analysis is conducted on a random sample of 66 non-financial Brazilian listed companies in the 2005-2012 period. To measure voluntary disclosure, the index proposed by Consoni and Colauto (2016) is used. As a proxy for earnings management, discretionary accruals (DA) are estimated based on the model by Dechow, Sloan, and Sweeney (1995). The relationship between these measurements is analyzed using a model of simultaneous equations and by the random effects regression method with panel data. A significant negative relationship was expected a priori; however, the main result of the study indicates that voluntary disclosure and earnings management are not simultaneously determined or associated. Although the results obtained contradict certain theoretical assumptions, there are alternative explanations for this finding. The empirical set of evidence in this research, in addition to those in previous studies, should be interpreted with caution because there is no consensus on the measures for voluntary disclosure and earnings management. Second, several companies in Brazil may not be interested in providing high-quality voluntary disclosure because most of their shareholders enjoy private benefits of control. This issue reduces the importance of the potential market demand for information, stratifies information asymmetry, and does not prevent earnings management.

Highlights

It is well known that corporate disclosure brings advantages such as greater stock market liquidity and a lower cost of capital (Botosan 1997, 2006; Lopes & Alencar 2010; Welker 1995), managers are not always willing to increase the level of accounting disclosure
This study aims to investigate the relationship between voluntary disclosure of economic and financial information and earnings management in the Brazilian capital market
The theoretical assumptions of this study were that, when managers decide the level of voluntary disclosure, they may be inclined to practice earnings management to shape market actors’ perceptions to suit their plans, perhaps even acting in their own self-interest

Summary

Introduction

It is well known that corporate disclosure brings advantages such as greater stock market liquidity and a lower cost of capital (Botosan 1997, 2006; Lopes & Alencar 2010; Welker 1995), managers are not always willing to increase the level of accounting disclosure. In addition to these benefits, there are most likely competing elements that may justify tighter managerial control over information, contributing to the importance of decisions about whether to disclose information. Greater information asymmetry allows managers to use their discretion for the specific purpose of managing accounting results

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