Balance Sheet Disclosure Research Articles

Does voluntary balance sheet disclosure mitigate post-earnings-announcement drift?

Theory suggests that balance sheet information such as total assets, total equity, or total liabilities complements earnings information in helping investors assess a firm’s profitability and estimate earnings growth. The voluntary disclosure of balance sheet information at earnings announcement could help investors gather and process this information at a lower cost. We therefore predict that voluntary balance sheet disclosure at the time of an earnings announcement helps investors promptly understand the implication of current earnings news for future earnings and subsequently reduces post-earnings-announcement drift (PEAD). Consistent with these predictions, our results show that when firms provide voluntary balance sheet disclosures, the earnings response coefficient in the event window is significantly higher and the corresponding PEAD is significantly lower. We further find that the impact of voluntary balance sheet disclosure on PEAD is more pronounced when the magnitude of balance sheet value surprise is larger, when balance sheet value is more informative about future earnings, when earnings uncertainty is higher, or when information cost is higher, consistent with our conjectures that helping investors to better understand future earnings performance and lowering information costs are key mechanisms underlying the effect of voluntary balance sheet disclosure on PEAD.

Ethical Banking and Islamic Banking : A Comparison of Triodos Bank and Islami Bank Bangladesh Limited

Ethical finance and Islamic finance are the two important topics in the post global financial crisis market environment and in the context of sustainable development goals and circular economy. If Islamic finance is inherently ethical finance, then what remains the difference between the two is an interesting theme for investigation. Islamic finance is governed by universal and divine legal and moral principles and standards related to economic transactions. Contemporary Islamic financial practices are however, strongly criticized for giving precedence to legal forms over ethical substance and for the rising gap between moral ideals and practical realities. Ethical finance is a conscious human effort to reform finance and it embraces environmentally, socially and morally conscious practices. In this paper we select two banks, namely Islami Bank Bangladesh Limited (IBBL) and Triodos Bank. We perceive that the first is an ideal Islamic Bank and the second is an ideal Ethical Bank. We undertake an analysis of the content of balance sheet disclosures of the two banks and try to gauge the similarities and divergences in their business principles and practices. The analysis uncovers that the current practices of IBBL may far exceed other Islamic banks in terms of financial inclusion, microfinance, gender balance, SME financing and green banking while still being financially stable and profitable. However, Triodos Bank has some significant lead over IBBL regarding ethical practices since it only promotes sustainable businesses. If Triodos Bank exceeds IBBL in ethical expectations as we conclude, then it is far ahead of other Islamic banks in such comparison. The implication of our conclusion is that Islamic banking needs ethical reform and this can be benchmarked with Triodos Bank’s business model. For Islamic banks the correct approach would be to strike the right balance between ethics, moral standards, Sharī‘ah compliance and profitability. The Islamic banking model has in-built features to ensure Sharī‘ah compliance, and this can be enhanced through adopting sound ethical practices as well as dedicating efforts towards being environmentfriendly. The paper attempted to present some considerations which if present in Islamic banks would take them away from the criticism of being only forprofit in motivation. Triodos has balanced its for-profit and not-for-profit motivations letting the later to lead the first.

Earnings Announcement Disclosures and Changes in Analysts' Information

AbstractThis study examines how financial disclosures with earnings announcements affect sell‐side analysts' information about future earnings, focusing on disclosures of financial statements and management earnings forecasts. We find that disclosures of balance sheets and segment data are associated with an increase in the degree to which analysts' forecasts of upcoming quarterly earnings are based on private information. Further analyses show that balance sheet disclosures are associated with an increase in the precision of both analysts' common and private information, segment disclosures are associated with an increase in analysts' private information, and management earnings forecast disclosures are associated with an increase in analysts' common information. These results are consistent with analysts processing balance sheet and segment disclosures into new private information regarding near‐term earnings. Additional analysis of conference calls shows that balance sheet, segment, and management earnings forecast disclosures are all associated with more discussion related to these items in the questions‐and‐answers section of conference calls, consistent with analysts playing an information interpretation role with respect to these disclosures.

Does Voluntary Balance Sheet Disclosure Mitigate Post-Earnings-Announcement Drift?

Theory suggests that balance sheet information helps investors assess a firm’s profitability and estimate earnings growth. We therefore predict that voluntary balance sheet disclosure at the time of an earnings announcement helps investors promptly understand the implication of current earnings news for future earnings and subsequently reduces post-earnings-announcement drift (PEAD). Consistent with these predictions, our results show that when firms provide voluntary balance sheet disclosures, the earnings response coefficient in the event window is significantly higher and the corresponding PEAD is significantly lower. We further find that the impact of voluntary balance sheet disclosure on PEAD is more pronounced when book value is more informative or when earnings uncertainty is higher, consistent with our conjecture that helping investors to better understand future earnings performance is a key mechanism underlying the effect of balance sheet disclosure on PEAD.

Default prediction with the Merton-type structural model based on the NIG Lévy process

Merton’s model (Merton, 1974) has long been a standard for estimating company’s probability of default (PD) for listed companies. The major advantage of Merton’s model is the use of current market prices to determine the probability of default. The logic behind the model is simple; the market prices best reflect all the relevant information (being forward looking estimates of company’s prospect) and should be (and are) superior to the balance sheet disclosures, which at best are ex post realisations of company’s performance. It is thus a pity that the benefits (strengths) of Merton’s model are hindered by a significant shortcoming of the model namely the assumption of normally distributed returns.As numerous authors point out (Barndorff-Nielsen, 1997 [5,6]; Prause, 1999; Eberlein, 2001; Brambilla et al. 2015), stock returns are not normally distributed which significantly limits the use of model in practice. Moreover the estimates of PDs can be biased downwards exposing the banks to the possibility of undercapitalisation and systematic shocks.It is the purpose of this paper to remedy this situation. Firstly we extend the Merton model by allowing for normal inverse Gaussian (NIG) distributed returns. As several authors point out using the examples of options (Schoutens, 2009), NIG in most cases provides a robust statistical platform for estimating stock returns. We further extend our approach by constructing a robust EM algorithm for estimating PDs within the Merton NIG framework.We also test the reliability of the NIG improved Merton model against classical Merton’s model for estimating PDs. Applying our results to Ljubljana stock exchange we find that the PD estimates using classical Merton’s model are biased, whereas the estimates from NIG Merton’s model are robust.

Earnings Announcement Disclosures that Help Analysts Forecast Earnings

This study examines how financial disclosures made with earnings announcements affect analysts’ information about future earnings, focusing on disclosures of financial statements and management earnings forecasts. We find that disclosures of balance sheets and segment data are associated with an increase in the degree to which analysts' forecasts of upcoming quarterly earnings are based on private information. Further analyses show that balance sheet disclosures are associated with an increase in the precision of both analysts' common and private information, segment disclosures are associated with an increase in analysts' private information, and management earnings forecast disclosures are associated with an increase in analysts’ common information. These results are consistent with analysts processing balance sheet and segment disclosures into new private information regarding near-term earnings. Additional analysis of conference calls shows that balance sheet, segment, and management earnings forecast disclosures are all associated with more discussion related to these items in the questions-and-answers section of conference calls, consistent with analysts playing an information interpretation role with respect to these disclosures.

Commitment and Cost of Equity Capital: An Examination of Timely Balance Sheet Disclosure in Earnings Announcements

AbstractIn this paper, I examine the relation between disclosure commitment and cost of equity capital using accelerated earnings announcement disclosures as a measure of commitment. In settings characterized by imperfect market competition, I find that firms which consistently disclose balance sheet detail in relatively timely earnings announcements have lower costs of capital compared to other firms. This result is statistically significant and economically meaningful, and is robust to various alternative measurements for cost of capital, and alternative designs addressing endogeneity and underlying information quality. Overall, this result is important because it highlights additional dimensions of disclosure commitment (consistency and timeliness), while incorporating important features from theoretical models (information quality and market competition). In particular, my results suggest that consistency and timeliness are salient features of firms' disclosure behavior that have predictable and robust relations with capital market outcomes. This result is robust to controlling for underlying information quality; however, consistent with theory, it is conditional on low levels of market competition.

Commitment and Cost of Equity Capital: An Examination of Timely Balance Sheet Disclosure in Earnings Announcements

In this paper, I examine the relation between disclosure commitment and cost of equity capital using accelerated earnings announcement disclosures as a measure of commitment. In settings characterized by imperfect market competition, I find that firms which consistently disclose balance sheet detail in relatively timely earnings announcements have lower costs of capital compared to other firms. This result is statistically significant and economically meaningful, and is robust to various alternative measurements for cost of capital, and alternative designs addressing endogeneity and underlying information quality. Overall, this result is important because it highlights additional dimensions of disclosure commitment (consistency and timeliness), while incorporating important features from theoretical models (information quality and market competition). In particular, my results suggest that consistency and timeliness are salient features of firms’ disclosure behavior that have predictable and robust relations with capital market outcomes. This result is robust to controlling for underlying information quality; however, consistent with theory, it is conditional on low levels of market competition.

The Valuation Effect of Accounting Standard 158 on Firms with High and Low Financial Risk

SFAS 158 mandated balance sheet disclosure of the funded status of firms’ Defined Benefit Pension Plan using the Projected Benefit Obligation (PBO) to estimate the pension liability. SFAS 158 caused a market phenomenon because the use of the PBO engendered dramatically higher estimates of pension liability and hence the perception of risk. Our work focuses on two aspects of this change in pension accounting: first, how will industry firms change their accounting strategy in light of the new rules, and second, how will firms’ stock prices be affected by the new allegedly better estimate of pension liability? Our research suggests that firms’ accounting strategies changed in that they use higher discount rates to estimate pension liability which offset the dramatic impact of using the PBO. In addition, we find that high financial risk firms’ tendencies to use higher discount rates increase with the firms’ leverage and decrease with liquidity. To test the market reaction we utilize standard event study methodology to investigate the effects of SFAS 158 on stock returns. Our findings suggest that firms with high (low) financial risk earn negative (positive) abnormal returns on and around relevant event dates preceding the implementation of SFAS 158.

An Excerpt from the SEC Commissioned Report: A Balance Sheet Disclosure Compliance Check of Ten Publicly-Listed Companies

This study is an excerpt of a SEC-commissioned report. It investigated the extent of compliance of 10 publicly-listed finance companies with regard to the provisions of relevant PFRS/PAS on balance sheet disclosure requirements. This was accomplished by examining the balance sheet and the related note disclosures of the 10 companies. It was found that all 10 companies had deficiencies in their balance sheet disclosures. It can be implied from this study that deficiencies in disclosure requirements stem from the standards themselves. Recommendations for the improvement of disclosure compliance were provided.

Balance Sheet Disclosures: An IFRS/PFRS Compliance Report of Ten Publicly Listed Companies in the Food Industry

From the beginning of January 2005, publicly traded companies in the Philippines have had to comply with the Philippine Accounting Standards (PAS) and the Philippine Financial Reporting Standards (PFRS) for their consolidated financial statements. It has been suggested that the new accounting standards will facilitate the process of international harmonization of financial statements. This study shows the outcome of the examination of ten publicly listed companies in the food industry’s financial reporting practices as regards their compliance with the financial reporting requirement embodied in PAS/PFRS and Securities Regulation code Rule 68 and 68.1.

Voluntary Disclosures in Earnings Announcements and Coincident Market Reactions

This study examines the relation between supplemental voluntary disclosures in firms' earnings announcements and the market reactions to these announcements. We find that abnormally high trading volume around earnings announcements is associated with disclosure of balance sheets, segment reports, range forecasts, and length of conference calls. We show that these trading volume findings can be explained by the relation between voluntary disclosures and disagreement measures developed by Kandel and Pearson (1995), Barron (1995), and Barron, Kim, Lim, and Stevens (1998) - disagreement measures already shown both theoretically and empirically to explain trading volume around earnings announcements (see Holthausen and Verrecchia 1990; Kandel and Pearson 1995; Kim and Verrecchia 1997; Bamber, Barron, and Stober 1997 and 1999; Barron, Harris, and Stanford 2005). In contrast to this trading volume evidence, we find that only balance sheet disclosures have a statistically significant positive association with the magnitude of price reactions. This increases understanding of why Cready and Hurrt (2002) observe trading volume reactions around earnings announcements more often than price reactions, because several types of concurrent voluntary disclosures spur abnormal trading that does not coincide with significant price reactions.

Disclosures that help Analysts Forecast Earnings

This paper examines how voluntary financial disclosures made with earnings announcements affect analysts' processing of these announcements and the accuracy of analysts' earnings forecasts. We find that analysts base their forecasts more on private information (and less on common information) after earnings announcements that include a balance sheet disclosure or segment reporting information. We also find that there is a greater improvement in the accuracy of the mean forecast after earnings announcements that include the voluntary disclosure of a balance sheet or segment reporting information.

Voluntary disclosure of balance sheet information in quarterly earnings announcements

We investigate a pervasive voluntary disclosure practice—managers including balance sheets with quarterly earnings announcements. Consistent with expectations, we find that managers voluntarily disclose balance sheets when current earnings are relatively less informative, or when future earnings are relatively more uncertain. Specifically, balance sheet disclosures are more likely among firms: (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. This is consistent with managers disclosing balance sheets in response to investor demand for value relevant information to supplement earnings.

Voluntary Disclosure of Balance Sheet Information in Quarterly Earnings Announcements

We investigate a pervasive voluntary disclosure practice ? managers including balance sheets with quarterly earnings announcements. Consistent with expectations, we find that managers voluntarily disclose balance sheets when current earnings are relatively less informative, or when future earnings are relatively more uncertain. Specifically, balance sheet disclosures are more likely among firms: (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. This is consistent with managers disclosing balance sheets in response to investor demand for value relevant information to supplement earnings.

Synthetic Leases: Structured Finance, Financial Accounting and Tax Ownership

The term is in vogue in the world of commercial real estate finance. In a lease transaction, money is borrowed based on the financial strength of a tenant and on that tenant's agreement to pay rent. The lender expects the debt to be serviced from the rental obligation of the tenant rather than from the financial resources of the nominal owner and borrower. The lease is synthetic insofar as it is designed to achieve a blended treatment: the tenant reports it as an operating lease for financial accounting purposes but as a mortgage for federal income tax purposes. This article explains lease transactions in the broader context of asset securitization and structured finance and contrasts the treatment of leases under financial accounting standards, mortgage law and federal income tax law. Although leases have long been treated differently for financial accounting purposes and tax law purposes, the article takes the position that the present divergence is too great. It takes the position that what needs fixing is not the tax law but the standards of the Financial Accounting Standards Board (FASB). It argues that FASB should eliminate the sharp distinction between sale-leaseback transactions and transactions in which an SPE acquires title from a third party. In particular, it argues that FASB should require balance sheet disclosure when the sine qua non of a transaction is an ex ante agreement that the tenant, not the landlord, will report that it is the substantive owner of an encumbered asset for federal income tax purposes.

The Australasian method for recording share issues: origins, adoption and institutionalisation

This paper examines the origins of the “Australasian” method of recording share issues, and the method's adoption and institutionalisation by practitioners into accepted accounting practice in Australia and New Zealand. It includes an investigation of late nineteenth century and early twentieth century company records (journals, ledgers and balance sheet disclosures); examination papers set by early accounting bodies in Australia and New Zealand; and a review of the accounting literature in Australia, New Zealand, United States, Britain, France and Germany. Possible factors leading to the adoption of the method in Australia and New Zealand are considered. No evidence substantiating the origin of the method in Australia and New Zealand was found, but a number of possible origins are suggested.

Towards Some Principles for Intangible Asset Accounting

Abstract This paper examines the conceptual issues of intangible asset accounting in the context of recent controversies over the treatment of brand names and goodwill in company accounts. Issues of definition and recognition and the rationale for balance sheet disclosure are considered for goodwill and other intangibles. The implications of capitalising intangibles under accounting models based on present value, net realisable value, current cost and historical cost are examined, and certain principles are proposed. The problem of testing the validity of asset valuation is explored, and a test is developed on the basis of the ‘recoverable amount’ rule of historical cost. This test is demonstrated for two major UK companies.

The Impact of New Pension Disclosure Rules on Perceptions of Debt

Statement No. 87 (SFAS 87) requires companies to report a pension liability when the accumulated benefit obligations exceed the fair value of the pension plan assets. A concern that led the Financial Accounting Standards Board (FASB) to issue SFAS 87 was that [f]ootnote disclosure is not an adequate substitution for [balance sheet] recognition [1985, para. 116]. In addition, the FASB concluded that while footnote disclosure may be adequate for some sophisticated users, it is not for most users. Opponents of SFAS 87 were concerned that balance sheet disclosure of a pension liability might negatively affect a user's perception of the financial condition of a particular company.1 This paper examines two views: (1) users do not treat pension information included in a footnote as they would a balance sheet liability; and (2) the difference in treatment will be more pronounced for less sophisticated users. Experimental results are consistent with the former view only. The remainder of this paper describes the research design and discusses the results of the experiment.