Disclosure Regime Research Articles

Continuous disclosure and information asymmetry

Purpose – This paper aims to examine whether firms with high information asymmetry disclose more information under a continuous disclosure regime, and, second, the paper examines whether continuous disclosures reduce information asymmetry. Design/methodology/approach – The study models relations between continuous disclosures and information asymmetry using ordinary least squares regression and two-stage least squares regression. Findings – The study finds firms with high information asymmetry disclose more information. Further, the study finds that disclosure in the presence of high information asymmetry increases asymmetry. Finally, while bad news increases information asymmetry, the disclosure of firm-specific good and bad news is associated with reduced information asymmetry. Originality/value – The paper identifies conditions under which Continuous Disclosure Regime increases information in markets and influences information asymmetry.

Editorial

Italy adds to the expanding net of voluntary disclosure regimes. Malta reviews its trust legislation. A New Zealand take on liquidation and the corporate trustee. The Quistclose trust and high finance. Court of Appeal examines the Hague Trust Convention. Lord Browne-Wilkinson’s Target judgment re-appraised by the Supreme Court. Resulting trusts and advancement. Secret trusts. Canadian appellate court upholds a decision following Pitt v Holt.

The Italian Voluntary Disclosure Programme: A New Era of Tax Amnesty?

In this article, the author sheds light on the various aspects and criticisms of the recently introduced voluntary disclosure regime.

Ownership Concentration and Corporate Disclosure Choice in Bangladesh

This paper investigates empirically the effect of ownership concentration on corporate disclosure choice in Bangladesh. In an environment of weak enforceability of laws, corporate culture in Bangladesh is characterized by family control and concentrated ownership. Controlling shareholders exercise nearly full control over a firm’s operating and financial policies, including disclosure policies, while maintaining low cash flow rights relative to voting rights. The paper shows that management’s choice of disclosure across key financial elements is discriminatory against external shareholders and bondholders. The findings show that controlling for factors such as age, size, profitability and financial leverage, ownership concentration reduces corporate disclosure. The findings validate the hypothesis of La Porta et al. (1999) that an increasing ownership concentration leads corporate management to adopt a disclosure regime which is biased against external shareholders and creditors.

Are Auditor and Audit Committee Report Changes Useful to Investors? Evidence from the United Kingdom

Recently, U.S. and international regulators have proposed significant changes to auditor and audit committee reporting with the stated intention of delivering more useful information to stakeholders. Whether new disclosure requirements achieve this intended benefit is unknown. We exploit the exogenous shock of the recent changes to auditor and audit committee reports in the United Kingdom and use abnormal trading volume to test the usefulness of these new reports to investors. We find that abnormal trading volume significantly increased following the implementation of the new disclosure regime, and that abnormal trading volume increased more for companies with weaker information environments. Additionally, we find evidence that companies employing auditors that tend to provide more (less) detailed audit reports experience more (less) abnormal trading volume. Overall, it appears that additional required disclosures from audit committees and auditors provide useful information to investors.

The Value of Board Gender Diversity vis-a-vis the Role of the Board in the Modern Company

A number of countries have begun to adopt quotas for the appointment of women directors on company boards. Countries like the United States and Australia, have adopted the disclosure regime by requiring that public listed companies must disclose their diversity policies in their annual reports. This article argues that the board gender diversity debate must focus on the role of the board of directors in order to determine if board gender diversity can be valuable. Thus it analyses the role of the board in modern company law and then weighs the arguments being used in favour of corporate gender quotas against this in order to ascertain if these arguments hold water.

Risk-Based Vulnerability Disclosure: Towards Optimal Policy

Computing has become increasingly ubiquitous and embedded (as demonstrated by industrial control systems, in-vehicle systems, in-home care systems, and within the energy and transportation infrastructures). As a result, the issue of responsible vulnerability disclosure has returned to the fore. These new computing contexts require revisiting the nature of vulnerabilities and redefining responsible disclosure. The first goal of this work is to critique current disclosure practices. Based upon these critiques, grounded in the history of vulnerabilities, and informed by a series of expert interviews, we propose a model of risk-based responsible disclosure.Research on vulnerability disclosure policy was an early focus in economics of security, particularly until 2006. That earlier research, however, reasonably assumed models of computers that were applicable to desktops, laptops, and servers. That is, there is a centralized source of patches, patching is possible in a very short time frame, patching is low cost, and the issue of physical harm need not be addressed. Current disagreements arise in part from the increasing diversity of both vulnerabilities and their potential impact. There are some clear lines. For example, it is not acceptable to disclose a vulnerability by implementing it and causing harm to victims. There are also well-known reasons for disclosure, specifically for creating incentives for vendors to patch and diffusing information to potential victims for their use in risk mitigation.The trade-offs between transparency and confidentiality are increasingly complex. Responsible disclosure must be equitable: informing the marketplace, incentivizing software manufacturers to patch flaws, protecting vulnerable populations, and simultaneously minimizing the opportunities for malicious actors. To understand and resolve these challenges, we begin with the current state of vulnerability research. Stepping back provides a high-level historical perspective from the first identifiable vulnerability in a mass-produced device (beyond the canonical physical bugs in the first highly custom computers) to the Superfish malware in 2015. We describe extant models of disclosure, identifying the strengths and weaknesses of each of these. After that, we summarize factors previously used as vulnerability (and thus disclosure) metrics. These historical analyses and technical critiques are augmented by a series of interviews with technology and policy experts.For the vast majority of vulnerabilities, the questions of public disclosure are not “if” but rather when and at what level of detail. We conclude that there is now no single optimal disclosure regime. Given this, we advocate for a model of disclosure grounded in risk-based analysis. Such an analysis should be complete and deterministic for a given context. We propose the factors necessary for such a systematic analysis. We then use well-known cases to test the framework and provide illustrative but practical examples.

Corporate governance and quality of forward-looking information

Purpose – The purpose of this paper is to investigate the association between corporate governance mechanisms and quality of forward-looking information in the Chinese stock market which presents a mandatory disclosure environment for forward-looking information. Design/methodology/approach – Using sales forecasts to proxy forward-looking information and using precision and accuracy to measure the quality of information disclosure, the authors investigate the impact of corporate governance attributes on the precision and accuracy of sales forecasts made by listed Chinese firms in their 2010 annual reports, using logistics and ordinary least squares regressions. Findings – The authors find good corporate governance has a positive and significant impact on the precision choice of sales forecasts disclosure. Firms with good corporate governance are more likely to disclose more precise sales forecasts than providing qualitative discussions on firms’ sales trend. In addition, good corporate governed firms are found more likely to provide precise non-financial information. The authors also find that good corporate governance is positively associated with making more conservative sales forecasts disclosure. However, the authors find no significant relationship between good corporate governance and smaller forecast error. Research limitations/implications – The study makes significant contributions to corporate disclosure literature. The authors investigate the determinants of the quality of forward-looking information in a mandatory disclosure regime while most forward-looking information disclosure literature have been conducted in a voluntary-based disclosure environment. The authors examine whether in a mandatory disclosure regime, corporate governance mechanisms can play a positive role in precision choices and accuracy of forward-looking information. Further, the study is the first to examine corporate governance and the quality of non-financial forward-looking information (sales target and production goal). The research findings therefore extend forward-looking information disclosure research from financial information to non-financial information. Practical implications – The empirical findings will provide regulators with evidence on the quality of forward-looking information in a mandatory disclosure regime and the influence of corporate governance on forward-looking disclosure. The properties of forward-looking information disclosure in China should be of interest to policy makers, investors and financial analysts in other international jurisdictions. Originality/value – The study investigates forward-looking information in a mandatory disclosure regime while most extant forward-looking information studies have been conducted in a voluntary disclosure environment. The study is the first to examine the quality of non-financial forward-looking information such as operational goals and plans, and to investigate the association between the quality of non-financial forward-looking information and corporate governance mechanisms. The research findings extend forward-looking information disclosure research from quantitative financial information to quantitative non-financial information.

Testing the effect of portfolio holdings disclosure in an environment absent of mandatory disclosure

AbstractThis study examines a number of portfolio disclosure regimes with respect to accuracy and susceptibility to copycat behaviour in an environment absent of mandatory disclosure. We find that periodic portfolio disclosure tends to underestimate true excess performance as well as idiosyncratic risk in top‐quartile fund managers, with longer inter‐reporting intervals tending to result in greater differences. ‘Copycat funds’ following the disclosed holdings of top‐tier managers significantly underperform the underlying fund, while copycats following bottom‐tier managers significantly outperform the underlying fund. Our findings suggest that periodic reporting at monthly intervals or longer would not affect fund alpha generation.

New information in continuous disclosure

Purpose – This paper aims to examine the price-sensitivity of information under capital market disclosure regulation, the Australian continuous disclosure regulation (CDR). Design/methodology/approach – The study tests the information content of continuous disclosures and identifies the firm characteristics that condition the price-sensitivity of information under CDR. Findings – The study provides evidence that continuous firm disclosures are significantly associated with stock price adjustment to information. Further results are consistent with firm disclosure and its information content being determined by the economics of the firm. Practical implications – The findings of the study support the introduction of ongoing and continuous disclosure regimes in a number of capital markets, and assist firms and regulators model the price-sensitivity of information under CDR. Originality/value – The study highlights the sources of an informed market, and contributes to our understanding of the conditions under which the CDR reveals unexpected information. The results provide evidence of an association between firm disclosure and stock price synchronicity, consistent with managerial incentives to disclose information.

An organizational perspective to funding science: Collaborator novelty at DARPA

Research funding is known to affect the rate and direction of scientific and inventive activity. Most commonly, this is understood as occurring through the allocation of funds toward certain types of research and by altering the disclosure regime. This paper calls attention to another set of factors that likely also influence scientific and technological outcomes, but has gone largely unexamined: organizational practices at research funding organizations. I explore these factors in a mixed-methods study of the Defense Advanced Research Projects Agency (DARPA). Leveraging 39 interviews of DARPA-funded scientists and program managers, I describe DARPA’s agency-driven approach to research program development and intense interpersonal management style. Next, I investigate the impact of these organizational practices on the behaviors of sponsored researchers, in particular the tendency of scientists to form novel collaborations. Using patent disclosure data from the Massachusetts Institute of Technology (MIT) Technology Licensing Office and employing coarsened exact matching to identify a control set of collaborations, I find that DARPA-funded research is at least 6.0 percentage points more likely to involve novel collaborations. A detailed exploration of the novel collaborations presents a picture that is consistent with the paper’s description of collaboration-promoting practices at DARPA. By identifying important organizational practices and examining their impact on scientist behavior, this paper aims to highlight the potential influence of organization practices on scientific and inventive activity.

The Rise of Independent Directors in Australia: Adoption, Reform and Uncertainty

Australia has a tradition of surprisingly large non-institutional blockholders in companies listed on the Australian Securities Exchange (ASX). This has arguably impacted on the roles and composition of boards. As outlined in Part II of this paper, for a book project on the spread of independent directors (IDs) throughout the Asian region, there has been a longstanding tension between those in Australia preferring a narrower view of directors’ roles and duties (focused on corporate performance) and those advocating a broader view (including more emphasis on risk management, which may favour smaller shareholders with less information about their firm’s activities). Nonetheless, there has been a shift since the early 1990s away from executive boards towards “monitoring” boards, with fewer members and more IDs, who are expected moreover to maintain minimum standards across a variety of roles.Yet this transition has not been rapid or particularly smooth (Part III). Following the corporate excesses of the late 1980s, in 1992 the ASX suggested the introduction of mandatory requirements for IDs. Following business opposition, it then proposed a UK-style “comply-or-explain” regime in 1994, but eventually had to settle on an even weaker disclosure regime from 1996. Only after a wave of much more serious corporate failures from around 2001, including one (One.Tel) harming very influential blockholders, did the ASX implement (from 2004) a requirement for listed companies to adopt a majority of IDs on an “if not, why not” basis. Minor revisions were made in 2007, but somewhat more stringent standards were implemented from 2014. The latter changes occurred in the shadow of some post-GFC legislative initiatives and case law that generally expanded the scope of duties owed by directors (including IDs), even though for various reasons Australia did not suffer major bank failures or a recession.As explained in Part IV, the cornerstone remains these ASX “Principles and Recommendations”, underpinned by Listing Rules (which furthermore mandate an audit committee since 2004, and a remuneration committee since 2011 albeit only for the largest 300 companies, each requiring a majority of IDs). There are comparatively and increasingly detailed criteria for assessing independence, such as whether the director has direct (or, since 2014, “family”) links with a “substantial” (5% ) shareholder. This factor differs from the US and appears to be derived from the UK, but it makes more theoretical sense in Australia given its significant blockholder tradition. Another interesting development has been a compromise reached in the 2014 ASX Principles regarding length of tenure, partly influenced by developments further afield including in Singapore and Hong Kong.Nonetheless, there is still only weak empirical evidence in Australia of positive effects from IDs, with respect to enhancing risk management and particularly corporate performance overall (Part V). A controversial econometric study published in 2013 concluded that over $69 billion in corporate value had been destroyed over 2003-2011 by the (largely) “if not, why not” ASX requirement for a majority of IDs on listed company boards. The authors were particularly critical of the ASX’s view that major shareholders (or nominees etc.) would lack independence as directors, arguing that they instead have incentives to monitor management better. However, this criterion was not changed significantly in 2014, with one concern being that a relaxation might disproportionately benefit large over smaller shareholders.There has also been little impact on policy-makers and regulators from a few other academic papers in Australia, which have recently queried the received wisdom about IDs from a variety of perspectives. Though speculative, a subconscious “status quo bias” may be at work, as well as interest group politics – there is now a large (and well-networked) anointed group of incumbent IDs, as well as various professional associations involved in “training” them. This lack of public discussion is unfortunate, as many problems remain to be properly explored from theoretical, empirical and comparative perspectives (Part VI), in order to potentially improve corporate governance in Australia and impact on developments abroad – especially in the Asian region.

The costs and benefits of short sale disclosure

During the recent Global Financial Crisis, numerous exchanges introduced mandatory disclosure requirements on short selling to increase transparency and support stock prices. This study examines the impact of the disclosure regime on short selling on the Tokyo Stock Exchange. While we find that on average short selling declines, we also note changes in shorting strategies, such as increase in trend chasing, demand for liquidity, and preference for previously less shorted stocks. More important, we show that the negative price reaction to large shorting is associated with significant increase in short term volatility, consistent with more trend-chasing behavior. Overall, our findings suggest that the disclosure requirement can adversely impact market liquidity and volatility by altering the composition of traders and increasing trend chasing.

Does stakeholder pressure influence corporate GHG emissions reporting? Empirical evidence from Europe

Purpose– The purpose of this paper is to seek to shed light on the practice of incomplete corporate disclosure of quantitative Greenhouse gas (GHG) emissions and investigates whether external stakeholder pressure influences the existence, and separately, the completeness of voluntary GHG emissions disclosures by 431 European companies.Design/methodology/approach– A classification of reporting completeness is developed with respect to the scope, type and reporting boundary of GHG emissions based on the guidelines of the GHG Protocol, Global Reporting Initiative and the Carbon Disclosure Project. Logistic regression analysis is applied to examine whether proxies for exposure to climate change concerns from different stakeholder groups influence the existence and/or completeness of quantitative GHG emissions disclosure.Findings– From 2005 to 2009, on average only 15 percent of companies that disclose GHG emissions report them in a manner that the authors consider complete. Results of regression analyses suggest that external stakeholder pressure is a determinant of the existence but not the completeness of emissions disclosure. Findings are consistent with stakeholder theory arguments that companies respond to external stakeholder pressure to report GHG emissions, but also with legitimacy theory claims that firms can use carbon disclosure, in this case the incomplete reporting of emissions, as a symbolic act to address legitimacy exposures.Practical implications– Bringing corporate GHG emissions disclosure in line with recommended guidelines will require either more direct stakeholder pressure or, perhaps, a mandated disclosure regime. In the meantime, users of the data will need to carefully consider the relevance of the reported data and develop the necessary competencies to detect and control for its incompleteness. A more troubling concern is that stakeholders may instead grow to accept less than complete disclosure.Originality/value– The paper represents the first large-scale empirical study into the completeness of companies’ disclosure of quantitative GHG emissions and is the first to analyze these disclosures in the context of stakeholder pressure and its relation to legitimation.

Determinants and economic consequences of voluntary disclosure of internal control weaknesses in China

This paper investigates the determinants and economic consequences of disclosure of internal control weaknesses (ICWs) by Chinese listed firms under the voluntary disclosure regime over 2010–2011. We find that the probability of firms disclosing ICWs is not only associated with firm characteristics such as profitability, age and business complexity, but is also strongly related to the unique attributes of corporate governance and ownership structure in Chinese listed firms, e.g. the independence of the supervisory board, political connections, concentration of the top 3 shareholders' ownership and tradability of shares.Our results show that the severity of the ICWs disclosed is negatively and significantly associated with earnings response coefficients (ERCs), and audit assurance of ICRs has a significant moderating effect on the relationship between ICWs and ERCs. Our research adds further evidence to support the implementation of SOX-type regulations globally.

Market Incentives and Regulators’ Activity Shaping Financial Information: An Analysis of the Net Debt Disclosure in Italy

As a performance indicator, net debt conveys information to assess firms’ gearing level and the ability to service the outstanding borrowings. Moreover, net debt is frequently used in debt covenants in order to reduce information asymmetry between borrowers and lenders and to enhance the efficiency of the debt contracting process. Notwithstanding the decision usefulness and the contracting relevance associated to net debt disclosure, contrasting positions have been suggested concerning the notion of- and the information about the net financial position. In particular, a regulated/narrow approach contrasts an unregulated/principle-based one, and both the academic literature and accounting profession are far from being unanimous on this issue. By examining financial statements of 60 Italian listed companies, we compare the content of the net debt disclosure produced in a non-regulated environment with that delivered within a mandatory disclosure regime. Our analysis shows that the adoption of a mandatory disclosure regime has only slightly enhanced the comparability of net debt disclosure and highlights the opportunistic nature of the disclosure about the net financial position. At the same time, the multivariate analysis shows the role that regulation could play as a low-cost commitment device.

Discretionary disclosures using a certifier

This paper studies two disclosure regimes when a firm with superior private information must rely on a strategic certifier to disclose credibly its prospects. In the ex ante (ex post) disclosure regime, the firm must decide on whether to hire the certifier before (after) observing the certifier׳s noisy assessment. Endogenously determined certification fees can actually cause the disclosure probability to decrease in disclosure precision. In the ex ante regime, favorable disclosures are more informative than unfavorable disclosures because of additional positive signaling effect. In the ex post (ex ante) regime, the certifier has incentives to increase (decrease) the disclosure precision.

Identity Disclosure and Information Sharing in Donor Conception Regimes: The Unfulfilled Potential of Voluntary Registers

This article explores the scope and effectiveness of formal donor identity registers currently in operation in assisted conception regimes in Australia and the UK. In particular, it examines the function of voluntary registers which are intended to fill the gaps left by ‘central’ identity registers which mandate timed release of donor identity on request of donor-conceived adults. There are three ‘gaps’ left by central registers identified here: conceptions which took place prior to the operation of the relevant registers; parents and offspring who desire access to identifying information or a means of making contact prior to the age set for information release; and parents and offspring who desire information not available under current registers, specifically, identifying information or a means of making contact with other offspring from the same donor. The article reflects on interviews with a set of 21 parents who had undertaken donor conception in Australia through licensed IVF treatment concerning their understandings of disclosure regimes and wishes for, and experience of, seeking information and contact. Voluntary registers established by government bodies in Australia and the UK have largely failed to deliver benefits, and indeed may offer a misleading promise to users, because they have given rise to such a small proportion of matches. These registers are ‘passive’ in that there is no outreach to parties not on the register to invite them to join when there is a match waiting there. However, voluntary registers could be reframed and resourced on a more facilitative basis to assist users. I propose that formal voluntary registers could be more usefully remade as ‘active’ registers, making contact with possible participants and offering intermediary services and counselling to establish and communicate expectations and to offer mediated contact, including contact without identity disclosure. Active voluntary registers could adapt current structures into a more flexible and responsive system capable of operating both prospectively and retrospectively. I contend that this is a better outcome than the current polarization between an inability to access information for many, on the one hand, and proposals such as retrospective identity disclosure without consent, on the other.

The association between risk disclosure and firm characteristics: a meta-analysis

The empirical literature on the determinants of risk disclosures offers mixed results. This complicates efforts among stakeholders to understand the factors affecting firms’ decision to report risk information. The aim of our paper is to analyze the findings of 42 empirical studies using a meta-analysis technique. We examine whether differences in the findings are attributable to random error or due to legal and institutional systems, uncertainty avoidance, disclosure regime (mandatory vs. voluntary), industry types, and the proxies used to measure corporate characteristics. We find that all moderators affect the relationship between corporate size and risk reporting. Legal system, disclosure regime, industry types, and leverage ratio measurement moderate the association between leverage ratio and risk disclosure. Industry types and uncertainty-avoidance level affect the relationship between profitability and risk disclosure. Finally, the association between risk factor and risk disclosure is moderated by industry types. We discuss the implications of our findings and offer suggestions for future research.

Necessity is the Mother of Invention: A Renewed Call to Engage the SEC on Social Disclosure

Corporate law in the United States is undergoing a significant but understated revolution. Delaware is one of nineteen states to adopt the benefit corporation, a corporate form that legally facilitates the pursuit of both financial and social ends. While the existing state statutes incorporate mandatory disclosure regimes, they lack the enforcement mechanisms necessary to guarantee the accuracy of benefit reports and are not sufficiently uniform to allow investors to make informed decisions. As such, this Note argues that the Securities and Exchange Commission (“SEC” or “Commission”) ought to amend its proxy disclosure and periodic reporting rules to ensure that registrants incorporated under benefit statutes provide substantial information about their social impact. Mandatory social disclosure has been rejected in the past—the condition of “materiality” has long governed corporate disclosure. The recent enactment of the Delaware benefit corporation suggests that some benefit corporations will become public companies. Thus, for the first time, social impact has become a legal obligation of corporate status, effectively expanding the scope of what is “material” to investors. The SEC’s broad investor protection mandate and its history of regulating financial disclosure put the Commission in the best position to introduce a social impact disclosure regime for publicly traded benefit corporations. Such a regime has the ability to preserve the benefit corporation as a legitimate corporate form and, importantly, legitimize its dual mission of purpose and profits. The author would like to thank Professor Harvey J. Goldschmid for his unwavering support and guidance throughout the writing process. She would also like to thank Professor Robert J. Jackson, Jr. for much-needed inspiration and the entire Columbia Business Law Review staff for their assistance in preparing this Note for publication. Finally, she would like to thank her parents for their unconditional support throughout law school and all of her other pursuits.