Informative Disclosures Research Articles

For Your Eyes Only?

Abstract: By means of their personal data, users on social media platforms get targeted to be persuaded by political advertisers with messages that are specifically tailored to them: political microtargeting. A substantial problem with political microtargeting is that receivers of targeted advertisements are often unaware that they are being targeted. Increasing transparency to improve awareness potentially leads to a more critical way of processing the information in an advertisement. Moreover, the use of these measures could lead to differences in users’ attention to the advertisement. Therefore, this study investigates whether a disclosure that informs users about targeting practices occurring on Instagram relates to more visual attention to the disclosure, whether this relates to more critical processing of the advertisement, and whether this relationship is mediated by users’ visual attention to the advertisement. In a preregistered one-factorial between-subjects laboratory eye-tracking experiment ( N = 134), we exposed participants to an Instagram timeline containing either a sponsorship disclosure (control condition) or a more informative targeting disclosure (experimental condition). Results show that the targeting disclosure did not relate to higher levels of visual attention to the disclosure, but that attention to the disclosure was positively related to more critical processing as well as participants’ visual attention to the ad. Nevertheless, the relation between attention to the disclosure and critical processing was not mediated by attention to the advertisement. Finally, we believe that these disclosures represent a step forward in improving transparency and shielding users.

Does social trust mitigate insiders' opportunistic behaviors? Evidence from insider trading

Does social trust restrain or exacerbate the opportunistic behaviors of corporate insiders? On the one hand, insiders susceptible to a high-trust environment will be less opportunistic; on the other hand, unethical insiders may exploit high-trust people to engage in more opportunistic behaviors. This paper tests the two competing hypotheses by investigating how trust surrounding corporate headquarters affects insider trading profitability, assuming that opportunistically informed trades have higher trading profits. We show that social trust negatively affects insiders' trading gains. This relationship holds after instrumental variable regressions and a difference-in-difference framework. Additionally, the role of trust is more prominent when insiders face more trading opportunities from information asymmetry, weak monitoring, and concentrated ownership structure; however, the impact of trust attenuates when formal regulations are in place. We also examine the indirect channels, including cautious financial reporting, informative disclosure, and active communications with investors through which social trust can deter informed trading. Our findings suggest that social trust can discourage opportunistic proclivity and spur more ethical deeds among managers.

Blockholder mutual fund participation in private in‐house meetings

AbstractThe Shenzhen Stock Exchange (SZSE) in China is unique worldwide in requiring disclosure of the timing, participants, and selected content of private in‐house meetings between firm managers and outsider investors. We investigate whether these private meetings benefit hosting firms and their major outside institutional investors—blockholder mutual funds (i.e., funds with ownership ≥5%). Using a large data set of SZSE firms, we find that blockholder mutual funds have more access to private in‐house meetings, and top management is more likely to be present, especially when a meeting is associated with negative news. Furthermore, when blockholder mutual funds attend negative‐news meetings with top management, they are less likely to sell shares, their investment relationship with the hosting firm lasts longer, and hosting firms experience lower postmeeting stock return volatility. These findings suggest that private in‐house meetings are an informative disclosure channel that improves social bonding between top management and blockholder mutual funds in ways that benefit hosting firms.

The Impact of Industry Specialist on the Relationship between Returns and Future Earnings

Abstract Financial statements reveal the company's profitability and be used as an important indicator of the risk assessment. Auditor industry specialists can provide better quality of financial reports and informative disclosures. According to Lundholm and Myers (2002), we examine whether the fact that accountants or audit firm are industry specialists will affect the relationship between returns and future earnings. Since there exists the special system of dual attestation in Taiwan, we divide the accountants into lead auditors or concurring auditors to examine the above relationship. Empirical results indicate that the higher future earnings response coefficients are associated with the companies audited by industry specialist, the higher number of industry specialists, the more industry experience of industry specialists and the greater market value of company. These findings imply that more information about future earnings are revealed. Therefore, it improves the disclosure of company's future earnings when the accountants or audit firms are industry specialists. In addition, we do not find the evidence that the future earnings response coefficients in companies audited by the lead auditor as industry specialist are higher than those in companies audited by the concurring auditor as industry specialist and in specialist accounting firms. JEL classification numbers: G34, M41, M42. Keywords: Industry specialist, Dual-signature, Future earnings response coefficient (FERC).

The Association of the Qualitative Informativeness of Market Risk Disclosures With Stock Liquidity

The SEC’s 2016 Concept Release summarizes the ongoing debate regarding the usefulness of market risk disclosures and calls for additional discussion. We respond to the SEC’s call and investigate market risk disclosures. Using textual analysis, we evaluate and classify the qualitative content of market risk disclosures and expect that more informative disclosures are associated with improved liquidity, consistent with disclosure theory. We find that informative textual contents of market risk disclosures are associated with higher liquidity levels and lower liquidity uncertainty (i.e., an improved investors’ information environment). Our study is relevant to the ongoing discussion regarding the usefulness of market risk disclosures, calls for more detailed regulatory guidance for market risk disclosures, and contributes to the literature on stock liquidity and risk factor disclosures.

Startup accelerator analysis: strategic decision on effort exertion and information disclosure regime

PurposeThis study aims to investigate a startup accelerator’s decisions toward exerting effort in an information acquisition process and selecting an information disclosure strategy. In particular, the authors are interested in examining which factors may cause the accelerator to report more or less accurate information, which will subsequently affect the investment decision and the outcome of the ventures. This study examines the impact of the equity share taken by the accelerator on the effort level being exerted in the information acquisition process, as well as the accelerator’s decision on the information disclosure regime.Design/methodology/approachThe authors use mathematical models built upon well-established theoretical and practical concepts to analyze the research problems and derive the findings.FindingsThe authors show that when the accelerator takes a sufficiently large equity share from the entrepreneur in exchange for admitting the entrepreneur’s venture into the acceleration program, the accelerator is motivated to exert a significant level of effort to observe an accurate signal for the quality of the venture, and then disclose the information about the venture’s quality consistently with the observed signal (informative disclosure regime). On the other hand, if the accelerator takes a small equity share, it is optimal for her to exert no effort in the information acquisition process and simply adopt the basic disclosure regime, where the accelerator reports the quality of the venture based solely on the ex ante expected payoff of the venture, regardless of the observed signal.Practical implicationsThe results indicate that an equity sharing scheme, which awards a sufficient amount of equity to the accelerator, can be an effective tool to help obtain accurate information about the quality of a startup venture and make a well-informed investment decision.Originality/valueThis research illustrates that the ownership stake of the accelerator can potentially indicate the accuracy of the information about the venture provided by the accelerator to outside investors. That is, when the stake held by the accelerator is large, the investors can conjecture that the information about the venture reported by the accelerator may be highly accurate and reliable. In contrast, if the accelerator holds a small stake, then it is likely that the information provided by the accelerator may not add any value to the publicly available information. These insights can guide investors (e.g. angle investors, venture capitalists, etc.) in making well-informed startup investment decisions.

Do Firms Provide Informative Disclosures in An Environment of Extreme Uncertainty? Evidence from the COVID-19 Pandemic

Do Firms Provide Informative Disclosures in An Environment of Extreme Uncertainty? Evidence from the COVID-19 Pandemic

The relation between non-GAAP earnings and accounting restatements: Evidence after regulation G

Scholarly findings on whether disclosure of Non-GAAP earnings is informative or opportunistic are inconsistent. Since the 2003 implementation of Regulation G, investors can view management's process of adjusting from GAAP earnings to Non-GAAP earnings. This study investigates the information content of Non-GAAP earnings in the context of restatements. The hypotheses of this study are based on the following two propositions. First, the informativeness of Non-GAAP earnings is determined by the nature of items excluded from GAAP earnings to derive Non-GAAP earnings (either nonrecurring special items or recurring exclusions). Second, restatements can be used to distinguish between informative and opportunistic Non-GAAP earnings disclosures. My results show that firms with restatements, especially fraud or core earnings restatements, exhibit greater relative use of Non-GAAP earnings disclosures that adjust GAAP earnings for positive other exclusions (recurring expenses). By contrast, disclosures of Non-GAAP earnings derived by excluding nonrecurring expenses (special items) from GAAP earnings are not associated with restatements.

More informative disclosures, less informative prices? Portfolio and price formation around quarter-ends

Fund trades and stock prices vary systematically with the quarterly reporting cycle. Funds accelerate trades that complete the building of existing positions at quarter-end but delay trades that initiate the building of new positions until the start of the new quarter. Evidence suggests these trade dynamics are driven by a dual desire to make disclosures more informative about future holdings but avoid disclosing incomplete positions. Consistent with disclosure-based motives unrelated to new information about intrinsic values driving these quarterly trade dynamics, both stock price informativeness and commissions paid by funds drop at quarter-end.

Firm Use of Cybersecurity Risk Disclosures

ABSTRACTIncreasingly, firms are subject to rising cybersecurity risks. One way that firms can communicate cybersecurity uncertainty and reduce information asymmetry with external stakeholders is through cybersecurity risk disclosures. SEC (2011, 2018) guidance encourages the disclosure of significant cybersecurity risk factors. However, not all firms provide informative or quality disclosures following a cybersecurity breach event. In this study, we examine firms' use of cybersecurity risk disclosures after a cybersecurity breach. We find that not all breached firms alter their cybersecurity disclosure behavior similarly following a breach. Rather, firm prior breach experience and breach-related market reactions impact the provision of additional cybersecurity disclosures. Our study provides initial evidence on when firms provide additional cybersecurity disclosures post-breach and informs regulators and policymakers on how firms utilize cybersecurity risk disclosures as a response behavior.

The Effect of Auditor Reporting Choice and Audit Committee Oversight on Management Financial Disclosures

ABSTRACTWe investigate the joint effects of auditors' reporting choice and audit committee effectiveness on management disclosures about complex estimates. A new PCAOB standard requires auditors to report on Critical Audit Matters (CAMs): issues “communicated or required to be communicated to the audit committee” about accounts or disclosures that (1) “are material to the financial statements,” and (2) “involved especially challenging, subjective, or complex auditor judgment” (PCAOB 2017a, 11). Consistent with investor arguments, we find that audit committee effectiveness and more detailed CAM reporting encourage managers' disclosures of the risk underlying complex estimates. When the auditor's report is more informative about a complex estimate and the audit committee is more effective, management's related financial disclosures are more forthcoming. However, less informative auditor disclosures or more effective audit committees alone do not prompt greater management disclosure. Thus, expanded auditor reporting and more effective audit committees, together, can enhance the disclosures investors value.

The Effect of Mandatory Information Disclosure on Financial Constraints

This paper studies the effects of the mandatory implementation of a more informative disclosure regime on firms’ financial constraints and investment policies. I run a difference-in-difference analysis and find that firms moving from a voluntary use of the regime to a mandatory use increase debt issuance and investment in tangible assets, and reduce the level of discussion about difficulties in obtaining debt financing. At the same time, they report higher difficulties obtaining external finance through equity. These findings support the hypothesis that mandatory disclosure provides a commitment device to future disclosure but shuts down the signaling value of voluntary disclosure.

CORPORATE SOCIAL RESPONSIBILITY DALAM BINGKAI SYARIAH

Research in corporate social responsibility (CSR) has long been established yet there are still new dimensions for its discussion within the Islamic perspective. This study undertakes the investigation of CSR within the Islamic banking industry utilizing the Shariah Enterprise Theory (SET). It seeks to identify whether the factors of size, profitability and shariah compliance may play role in the disclosure of CSR by Islamic banks in Indonesia. All registered Islamic banks in Indonesia publishing their annual report for the period of 2011-2016 were employed as samples of this study. The findings demonstrated that some of the sampled banks have provided extensive and informative disclosure of CSR. Simulteanously the three studied variables consisting of size, profitability and shariah compliance were found to influence the CSR disclosure. Nevertheless, partially while bank size and profitability were found to influence the CSR disclosure yet there was no influence of shariah compliance towards CSR disclosure. This gives an interesting insight for further examination in future studies

Institutional Investor Attention and Firm Disclosure

ABSTRACT We study how short-term changes in institutional owner attention affect managers' disclosure choices. Holding institutional ownership constant and controlling for industry-quarter effects, we find that managers respond to attention by increasing the number of forecasts and 8-K filings. Rather than alter the decision of whether to forecast or to provide more informative disclosures, attention causes minor disclosure adjustments. This variation in disclosure is primarily driven by passive investors. Although attention explains significant variation in the quantity of disclosure, we find little change in abnormal volume and volatility, the bid-ask spread, or depth. Overall, our evidence suggests that management responds to temporary institutional investor attention by making disclosures that have little effect on information quality or liquidity. JEL Classifications: G23; G32; G34; G12; G14.

Cybersecurity Investments and the Cost of Capital

While firms have been steadily making cybersecurity investments, only a tiny fraction discloses information about such investments. This is puzzling because an informed market must reward firms that are reducing risks by managing security well and informing the market through regulatory disclosures. While anecdotes support such incentives, arguably, the lack of concrete evidence establishing the value for firms tied to cybersecurity investment disclosures perpetuates such behavior. Consequently, this study uncovers an important incentive for disclosures by answering: are financial markets efficient enough to reward disclosures of cybersecurity investment by reducing the firm’s cost of capital? We utilize exogenous variations in SEC comment letters, which shift a firm’s disclosure activity randomly, and find that one standard deviation increase in disclosing cybersecurity investments in SEC filings reduces the cost of capital by 7%. The effect is stronger for more informative disclosures, firms with more analysts followers, firms that are more likely to be invested by institutions, and when firms raise capital. The effect vanishes when either the investment or disclosure is inadequate. The findings highlight the role of reducing information asymmetry in connecting voluntary disclosures of cybersecurity investments with financial advantages.

The role of information disclosure in financial intermediation with investment risk

We study how information disclosure affects financial intermediation when the payoff to the long-term investment is risky. The analysis is based on a business-cycle version of the bank run model wherein a bank provides risk sharing to demand depositors who experience unobservable shocks to their liquidity preferences. The bank pre-commits to the precision of an interim signal regarding the payoff to the long-term investment. We examine the impact of bank disclosure on optimal risk sharing achieved by run-proof, signal-contingent demand-deposit contracts. We show that for utility functions that display non-increasing absolute risk aversion, more informative disclosure improves the ex ante risk sharing provided by financial intermediation.

Do Risk Disclosures Relating to the Use of Financial Instruments Matter? Evidence from the Australian Metals and Mining Sector

This paper investigates the value relevance of risk disclosures relating to the use of financial instruments in the Australian metals and mining sector. The metals and mining sector is the largest sector in Australia by the number of companies and includes several of the world’s largest diversified resource producers. Using a manually constructed disclosure index based on AASB 7 Financial Instruments: Disclosures, we find that financial instrument-related risk disclosures provide useful information to equity investors. In terms of individual risk category, liquidity risk is shown to be the most informative risk disclosure. We contribute to a stream of the literature examining the informativeness of risk disclosures. The results of this study have implications for several stakeholders regarding the quality assessment of risk reporting. In addition, the findings are of interest to standard setters since further regulatory changes are under consideration to improve the presentation and disclosure of financial instruments.

A Narrative Analysis Using the Concept of Tabligh on the Obligation of Financial Statements Disclosure

Facts show that the rate of the disclosure financial statements by full-fledged sharia financecompaniesinIndonesiaisstillhighlylimited.Outofthreecompanies,onlyPT.Al Ijarah Indonesia Finance which give full and voluntary financial statements disclosure. This research aims to reveal the motivation of financial statements disclosure by full-fledged sharia finance companies using the concept of tabligh. This research uses theparadigmof tauhidandqualitativeapproach.Dataiscollectedbyintervieweingfour key informants from PT Al Ijarah Indonesia Finance to uncover motives and document study. Data is analyzed using Greimas’ structural narrative analysis and combined with the concept of tabligh. The results of the research show that the motive of financial statements disclosure by PT Al Ijarah Indonesia Finance is to communicate (tabligh) the financial statements to the stakeholders so that a broad and clear picture of the company is provided. Communicating (tabligh) informations broadly and clearly is what PT Al Ijarah Indonesia Finance aims for, which can be explained in several narrative relations; first, internal relations in which the constraints of ALIF internal disclosure become the consideration for the publication goodwill, which when combined with the concept of tabligh becomes the foundation of the disclosure. Second, the extent and content of the disclosure in the relation of subject and object as an informative disclosure, and when combined with the concept of tabligh becomes an extensive disclosure. The last relation is the disclosure media as the target of disclosure in the relation of sender and receiver, so that when combined with the concept of tabligh it becomes an effective act of communication.

Customers’ Risk Factor Disclosures and Suppliers’ Investment Efficiency

ABSTRACTThis study examines the effect of downstream firms’ (i.e., customers’) risk factor disclosures contained in annual reports on the investment efficiency of upstream firms (i.e., suppliers). We find that more informative disclosures of customers’ risk factors are associated with less under‐ or overinvestment by suppliers. In addition, this inverse association is stronger when the suppliers are at a bargaining disadvantage, when they operate in the durable goods industries, and when they are more concerned about the volatility of future demand. Overall, our results suggest that risk factor disclosures provided by firms in their annual reports contain useful information that could potentially help their suppliers achieve better investment efficiency.Divulgation d'information sur les facteurs de risque des clients et efficience de l'investissement des fournisseurs

The substitutive relation between voluntary disclosure and corporate governance in their effects on firm performance

Prior literature shows that financial disclosures and corporate governance both impact firm performance. This paper documents an important topic that has been overlooked in the prior literature, their joint effect, because the two mechanisms could be independent, substitutive, or complementary in their impact on firm performance. We find a substitutive relation based on data from 2005 to 2013 for a sample of US biotech firms, but only for firms with products in advanced stages of development, because their disclosures are trustworthy about the firms’ future performance. We do not find such effect for firms with early-stage products, that would take years to convert to profits, and whose product-related disclosures are speculative at best. This paper shows that informative and reliable voluntary disclosures have similar value-increasing effect as corporate governance and that the marginal effect of trustworthy disclosures is decreasing in governance. To the extent that the two mechanisms are costly, firms can partly substitute one for the other.