Firm Disclosure Research Articles

How Does Private Firm Disclosure Affect Demand for Public Firm Equity? Evidence from the Global Equity Market

We investigate the relationship between private firms’ disclosures and the demand for the equity of their publicly traded peers. Using data on the global movement of public equity, we find that a one standard deviation increase in private firm disclosure transparency – proxied by the number of disclosed private firms’ financial statement line items — reduces global investors’ demand for public equity by 13% to 16% or by $206 million to $253 million in dollar terms. These findings are consistent with private firm disclosures generating negative pecuniary externalities – global investors reallocate their capital away from public firms to more transparent private firms — and less consistent with these disclosures creating positive information externalities that would benefit public firms. Consistent with this interpretation, we find that the reduction in demand for public equity is offset by a comparable increase in capital allocation to more transparent private firms. Using staggered openings of the Bureau van Dijk database offices in each investee country as a plausibly exogenous shock to private firm disclosures, we conclude that the negative relationship between private firm disclosures and public equity demand is likely causal.

How Does Better Access to Public Firm Disclosures Affect Private Firm Financing?

How Does Better Access to Public Firm Disclosures Affect Private Firm Financing?

Does Compensation Matter? Evidence from CD&A Disclosures

We study whether the similarity of firm disclosures on the Compensation Discussion and Analysis (CD&A) has predictability for future stock returns. We find that changes to the language and construction of the CD&As predict firms' future stock returns. A portfolio that longs the CD&A non-changers and shorts the changers earns a significant Fama-French 5-factor alpha of 5.86% (annualized), for the period of 2008-2020. We further find that companies with low CD&A similarities invest less in R&D, are more likely to be targeted by short-sellers, and have greater forced CEO turnovers. Our results provide new and strong evidence on the role of executive compensation in the cross-section of stock returns.

How Does Private Firm Disclosure Affect Demand for Public Firm Equity? Evidence from the Global Equity Market

We investigate the relationship between private firms’ disclosures and the demand for the equity of their publicly traded peers. Using data on the global movement of public equity, we find that a one standard deviation increase in private firm disclosure transparency – proxied by the number of disclosed private firms’ financial statement line items – reduces global investors’ demand for public equity by 11% to 12% or $174 million to $190 million in dollar terms. These findings are consistent with private firm disclosures generating negative pecuniary externalities – global investors reallocate their capital away from public firms to more transparent private firms – and less consistent with these disclosures creating positive information externalities that would benefit public firms. Consistent with this interpretation, we find that the reduction in demand for public equity is offset by a comparable increase in capital allocation to more transparent private firms. Using staggered openings of the Bureau van Dijk database offices and implementation of electronic business registers in investee countries as plausibly exogenous shocks to private firm transparency, we conclude that the negative relationship between private firm disclosures and public equity demand is likely causal.

Green Gaps: Firm ESG Disclosure and Financial Institutions’ Reporting Requirements

Background: Globally, governments are responding to climate change. The financial industry has followed, integrating climate risk to their investment decisions via Environment, Social and Governance (ESG) considerations. Firms in environmentally sensitive industries, like oil and gas, are notably scrutinized for their ESG performance especially regarding climate change. Methods: Two samples were selected for a content analysis and comparison of environmental disclosure and investor requirements. The first sample is comprised of the sustainability reports for 30 oil and gas firms operating within Alberta. The second sample includes the ESG reports of 19 financial institutions with investment in the oil and gas industry. This data was triangulated via fieldnotes from conferences and informal discussions with oil and gas and financial industry representatives. Results: We find that both ESG investor requirements and firm disclosures suffer from a lack of standardization. Consequently, the financial industry is moving toward the adoption of the TCFD (Task Force on Climate-related Financial Disclosures) recommendations and the SASB (Sustainability Accounting Standards Board) framework in firm evaluations. European financial institutions have been leading the way in requiring firms to define their climate risk, set targets, measure performance, show improvement, and connect to strategy. Alberta oil and gas companies are responding with more robust ESG disclosure, though SASB and TCFD reporting is not yet widespread. Conclusions: Industry failure to respond to evolving disclosure requirements can lead to divestment. We contend that oil and gas companies that do not acknowledge climate risk and outline energy transition strategies tied to their business models and reputations potentially sacrifice access to capital. We expect firm ESG disclosure, especially radical transparency on environment, to increase as financial institutions execute on climate change risk evaluations. We contribute to the sustainability reporting and ESG literature by showing the impact of investors as stakeholders in effecting change to oil and gas firm level environmental disclosure.

Board Governance, Business Ethics, and Firm Social Responsibility Disclosure

This paper wants to investigate the impact of board control on social responsibility disclosure. The duration of this study covers three years, i.e., from 2014 until 2016. The population is from public manufacturing companies in Indonesia, and the samples are taken by a simple random sampling method. To analyze the data, the regression model gets used. This research concludes that a positive influence of the supervising board size and the woman portion in this board on the firm social responsibility disclosure is available. Also, business ethics positively affect it.

Tax Misperception and its Effects on Decision Making – Literature Review and Behavioral Taxpayer Response Model

ABSTRACT Previous accounting research shows that taxes affect decision making by individuals and firms. Most studies assume that agents have an accurate perception regarding their tax burden. However, there is a growing body of literature analyzing whether taxes are indeed perceived correctly. We review 128 studies on the measurement of tax misperception and its behavioral implications. The review reveals that many taxpayers have substantial tax misperceptions that lead to biased decision making. We develop a Behavioral Taxpayer Response Model on the impact of provided tax information on tax perception. Besides individual traits, characteristics of the tax information and the decision environment determine the extent of tax misperception. We discuss opportunities for future research and methodological limitations. While there is much evidence on tax misperception at the individual level, we hardly find any research at the firm level. Little is known about the real effects of managers’ tax misperception and on how tax information is strategically managed to impact stakeholders. This research gap is surprising as a large part of the accounting literature analyzes decision making and disclosure of firms. We recommend a mixed-method approach combining experiments, surveys, and archival data analyses to improve the knowledge on tax misperception and its consequences.

Tax Misperception and Its Effects on Decision Making – a Literature Review

Previous accounting research shows that taxes affect decision making by individuals and firms. Most studies assume that agents have an accurate perception regarding their tax burden. However, there is a growing body of literature analyzing whether taxes are indeed perceived correctly. We review 127 studies on the measurement of tax misperception and its behavioral implications. The review reveals that many taxpayers have substantial tax misperceptions that lead to biased decision making. We develop a Behavioral Taxpayer Response Model on the impact of provided tax information on tax perception. Besides individual traits, characteristics of the tax information and the decision environment determine the extent of tax misperception. We discuss opportunities for future research and methodological limitations. While there is much evidence on tax misperception at the individual level, we hardly find any research at the firm level. Little is known about the real effects of managers’ tax misperception and on how tax information is strategically managed to impact stakeholders. This research gap is surprising as a large part of the accounting literature analyzes decision making and disclosure of firms. We recommend a mixed-method approach combining experiments, surveys, and archival data analyses to improve the knowledge on tax misperception and its consequences.

Consumers care and firms should too: On the benefits of disclosing supplier monitoring activities

AbstractStakeholders increasingly put pressure on firms to ensure their suppliers' adherence to corporate social responsibility principles and standards. A firm's supplier monitoring activities (SMA) are, thus, central to achieving supply chain transparency. In an effort to help build a business case for SMA, this research explores the effect of SMA disclosures on consumers' attitude toward the firm and purchase intention. In so doing, we also examine how consumer attitude and purchase intention vary as a function of SMA disclosure characteristics. The results of three behavioral studies reveal more positive consumer attitude and higher purchase intention when a firm discloses that its supplier monitoring extends to lower‐tier suppliers (SMA depth) and the firm monitors its lower‐tier suppliers directly rather than relying on its first‐tier suppliers or third parties to do so (lower‐tier supplier monitoring mechanism). Greater SMA breadth—monitoring both suppliers' social and environmental activities—in turn, is not associated with more positive consumer attitude and higher purchase intention. Further, attitude toward the firm mediates the relationship between SMA disclosure characteristics and purchase intention. Collectively, these findings underline that consumers value firms' SMA and point toward an economic rationale for a firm's transparency regarding its supplier monitoring efforts.

CSR disclosure of foreign versus U.S. firms: Evidence from ADRs

Corporate social responsibility (CSR) is increasingly demanded by investors worldwide. In this article, we study whether foreign firms listed on U.S. capital markets are competitive to U.S. firms in providing better CSR disclosure. We also examine whether such transparency allows foreign firms to achieve a competitive advantage relative to their U.S. counterparts. Using environmental, social, and governance disclosure scores, we find that foreign firms disclose more than comparable U.S. firms, particularly in the environmental and social dimensions of CSR. Furthermore, we find consistent evidence that foreign stocks experience lower idiosyncratic volatility, better liquidity, and higher institutional ownership relative to other comparable U.S. stocks due to a higher CSR disclosure of foreign firms.

Online Appendix for The Effect of Board Structure on Firm Disclosure and Behavior: A Case Study of Korea and a Comparison of Research Designs

This Online Appendix contains additional discussion of the exogeneity of the legal shock on which we rely, as well as additional results for Black, Kim, and Nasev, The Effect of Board Structure on Firm Disclosure and Behavior: A Case Study of Korea and a Comparison of Research Designs (Journal of Empirical Legal Studies, 2021). The underlying article is available from SSRN at http://ssrn.com/abstract=2133283.

Firm characteristics and Biological Asset Disclosure on Agricultural Firms

Agriculture firms are facing challenges on applying the Statement of Financial Accounting Standards (PSAK) 69 which regulates the recognition, measurement, disclosure, presentation and reporting biological assets because of the unique trait of biological assets. This research aims to decide the factors that influence the biological asset disclosure by testing the effect of leverage, profitability, liquidity, firm’s growth, biological assets’ intensity, firm size, type of auditor, and listing status. The samples used in this research are the agriculture firms listed on the Indonesia Stock Exchange (IDX) between 2016 and 2018. The data are collected from the auditor financial statement. This research uses a quantitative method with multiple linear regression analysis. The conclusion is that the intensity of biological asset influences the biological asset disclosure, while leverage, profitability, liquidity, firm’s growth, firm size, type of auditor, and listing status do not influence the biological asset disclosure. This research contributes as literature for academics, gives knowledge about agriculture firm’s problems for the standard compiler, and improving the agriculture firms’ obediency in disclosing their biological asset following the PSAK 69

Everyone Has an Opinion: The Informativeness of Social Media’s Response to Management Guidance

We examine whether the social media reaction to an important firm disclosure provides a signal of the quality of that disclosure and whether capital market participants’ reactions to the disclosure are consistent with the social media reaction. Specifically, we examine the sentiment of posts on StockTwits immediately following management forecasts and offer three main findings. First, the relation between StockTwits sentiment and forecast news is stronger when the forecast is later revealed to be more accurate and less biased, suggesting that StockTwits provides an early signal of forecast quality. Second, we find a positive association between the extent to which social media sentiment agrees with the forecast news and stock price reaction to the management forecast. This suggests that when social media sentiment agrees with management forecast news, investors do too. Finally, we find a positive association between the extent to which social media sentiment agrees with the forecast news and subsequent analyst forecast revisions, particularly when forecast news is positive. This suggests that when social media sentiment agrees with positive management forecast news, analysts do too. Intraday analysis provides preliminary evidence that investors appear to respond to sentiment, but long-run tests suggest that investors appear to underreact to the signal provided by social media sentiment, while analysts appear to overreact to the signal. Overall, our results suggest that the social media reaction to management forecasts provides a timely and accurate reflection of not only the forecast’s quality, but also of how the forecast will be received by important capital market participants.

The Materiality of Quantitative Disclosure in Annual Reports

Firms are not required to disclose immaterial information (i.e., information that fails to influence a current or prospective stakeholder). Nevertheless, regulators have recently called attention to high levels of immaterial disclosure in firms’ annual reports, and express concern that such disclosure makes it difficult for investors to identify and respond to information that is relevant for their decision-making. I examine the determinants of disclosure materiality for quantitative disclosures in annual reports (i.e., the magnitude of quantitative disclosure relative to firm assets). I find that the disclosure of lower materiality information is positively associated with macroeconomic uncertainty, firm-level litigation risk, and manager-level risk-aversion, but not with a manager’s incentive to obfuscate. Finally, I find some evidence that lower materiality disclosure is associated with negative capital market consequences. Overall, these results imply that regulators might be able to improve the materiality of quantitative disclosure by (1) reducing ‘one-size-fits-all’ disclosure regulations, and (2) providing more legal (i.e., safe harbor) protection for firms and managers as they make decisions about disclosure materiality.

The impact of intellectual capital and related party transactions on contractual costs

PurposeThe present study aims to assess the potential effects of intellectual capital (IC) and disclosure of firms' affiliate transactions on contractual costs (CC).Design/methodology/approachThe statistical population of the study includes 768 firm-year observations listed on the Tehran Stock Exchange during 2012–2017. According to Pulic's model, the authors divide IC into three components, such as human capital (HC), relational capital and structural capital (SC). CC is also measured by utilising two variables of board cash compensation and unexpected reward of managers.FindingsThe results show that there is a negative and significant relationship between HC and CC. In contrast, the authors find that relational capital and SC have a positive impact on CC. The authors’ further analyses also demonstrate that disclosure of transactions with affiliates has a negative effect on unexpected rewards of managers.Originality/valueSince there is no conducted study, which discusses the relationship between IC and contractual cost, this paper might be considered the primary studies conducted in this line of literature, specifically in emerging markets. Moreover, to the best of the authors' knowledge, this is the first study investigating the potential impact of disclosure of selling and purchasing transactions, separately, on the director's unexpected reward.

Reexamining investor reaction to covert corporate political activity: A replication and extension of Werner (2017)

AbstractResearch SummaryExploiting a whistleblower's leak of the American Legislative Exchange Council's (ALEC) corporate sponsors, we quasi‐replicate and extend Werner's (2017) event study of investor reaction to covert corporate political activity (CPA). Werner found that investors reacted positively to the accidental disclosure of covert ties to the Republican Governors Association. In contrast, when we apply the same research design to the ALEC leak, we find that, on average, firms tied to ALEC experienced negative abnormal returns. In cross‐sectional models, we also find that the abnormal returns of ALEC sponsors were more negative for firms that faced shareholder contention around CPA and had liberal‐leaning employees, yet less negative for firms engaged in higher levels of institutional corporate social responsibility. The latter two cross‐sectional findings extend Werner's results.Managerial SummaryWe replicate and extend a study that examined how investors reacted to the disclosure of firms' covert contributions to a conservative‐leaning nonprofit organization. In contrast to that paper, we find that investors react negatively toward firms that contributed to ALEC, given its controversial positions on sociopolitical issues such as “stand your ground” gun laws. Investors reacted more negatively if the firm's employees were more liberal leaning or if the firm recently faced a shareholder resolution requesting that it voluntarily disclose all political contributions. However, investors' reactions were less negative if the firm engaged in high levels of corporate social responsibility. An implication for managers is that they should consider the risk associated with their firms' covert ties to political organizations perceived as controversial by the media.

Life Cycles of Firm Disclosures

We examine the link between product life cycles and disclosure using a novel 4-stage text-based life cycle model and report two main results. First, the standard link between competition and less disclosure holds primarily in the early product development life cycle stage, when product strategies are not fully public. Second, firms with mature-stage products disclose more, consistent with lowering search costs for an outward-focused investment strategy seeking synergistic partners. These results obtain across a wide array of disclosure policies and in a quasi natural experiment. Our interpretations are further supported by tests examining not only the sender of disclosure, but also the intended receiver.

Stock-market disruptions and corporate disclosure policies

We examine managers’' disclosure decisions in response to non-fundamental price shocks. Using mutual fund fire sales as a source of market disruption, we show some firms respond by issuing earnings guidance. Others, especially firms with weaker performance and more short-term-oriented investors, engage in accrual-based earnings management. To identify the efficacy of firm disclosure choices, we examine passage of Sarbanes-Oxley and Regulation Fair Disclosure and show that they increased reliance on guidance rather than earnings management. The shift is associated with faster post-fire-sales price recovery, suggesting enhancing information disclosure rather than manipulation is effective in mitigating the effect of market disruptions.

Peer effects in corporate disclosure decisions

This study examines peer effects in corporate disclosure decisions. Peer effects suggest that the average behavior of a group influences the behavior of individual group members. Consistent with peer effects, I find that disclosures made by industry peers induce firm disclosure. Peer effects in disclosure are more pronounced when a firm's strategic uncertainty is higher, indicating that peer firm disclosure reduces the external uncertainty arising from the firm's interaction with its industry peers and thus increases the precision of managerial private information. I also find that peer effects are stronger when a firm's dependence on external financing is greater, suggesting that peer firm disclosure increases the costs on firm visibility and reputation in capital markets. Overall, these findings suggest that peer firm disclosure shapes a firm's information environment.

General propensity for inter-organizational environmental disclosure imitation: an international perspective

ABSTRACT This paper examines the determinants of the general propensity toward inter-organizational imitation of environmental disclosure. We approach inter-organizational imitation as the vector for change in similarity within four embedded institutional reference levels, i.e., the international level (across all firms from the six countries), the international industry level, the country level, and the industry level within a country. Our sample comprises firms from six countries, three of which are from countries within the same free-trade agreement and the other from disparate countries not linked by such an agreement. Results show that the uncertainty in a firm’s country is positively linked to environmental disclosure inter-organizational imitation at each reference level. Furthermore, the similarity existing within a reference group and the cultural diversity on corporate boards of the imitating firm are negatively linked to environmental disclosure imitation. Finally, our results show that firms imitate the environmental disclosure of firms from other countries and industries more than those of their own country and industry. These results provide enhance our understanding of institutional contexts’ role in the evolution and diffusion of environmental disclosure practices.