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Review of Accounting Studies

Erschienen in:

01.03.2012

Information relevance, reliability and disclosure

verfasst von: Xiao-Jun Zhang

Erschienen in: Review of Accounting Studies | Ausgabe 1/2012

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Abstract

This paper examines the relation between information’s properties, such as reliability and relevance, and public disclosure policy. It shows that the optimal accounting system often involves a carefully balanced combination of mandatory and voluntary disclosure, with mandatory reporting focused on more reliable information. The emphasis on reliability causes the welfare-maximizing mandatory report to consistently lag behind the financial market in incorporating value-relevant information.

Vorheriger Artikel Hong Kong stock listing and the sensitivity of managerial compensation to firm performance in state-controlled Chinese firms

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Relevance refers to the information’s ability to "make a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events," and reliability is the "faithfulness with which a measure represents what it purports to represent" (pp. 5–6, Statement of Financial Accounting Concepts (SFAC) No. 2, FASB, Norwalk, CT, May 1980).

The model can be easily expanded to explicitly incorporate demand for information in the financial market.

See Fried (1984), Gal-Or (1985), Shapiro (1986), and Darrough (1993), among others, for more analysis of strategic information transfer between duopoly/oligopoly competitors.

A concurrent study by Arya et al. (2008) also examines a model with signal correlation and proprietary disclosure cost. Even though the present work analyzes the issue of aggregation in voluntary disclosure, its main focus is on mandatory reporting.

Because of the endogenous disclosure cost, results regarding how the content and accuracy of mandatory reporting affect the likelihood of voluntary disclosure differ from those of Einhorn (2005).

See, e.g., paragraph 44 of SFAC No. 2, FASB, Norwalk, CT.

A piece of information is considered to be soft if its interpretation varies across different parties (Ijiri 1975).

The results of this paper can be easily extended to a finite number of firms.

See Shapiro (1986), among others, for cases where firms have different production cost functions.

Quadratic cost function ensures that the optimal production level of each firm is finite. The essence of the results remain if the cost function is changed to other similar forms, such as (q _fat + q _fbt)².

To focus on the inductive role of mandatory reporting, it is assumed that the distribution of \((\widetilde{\varepsilon }_{at+1},\widetilde{\varepsilon }_{bt+1}), \) together with the contracting cost involved between government and all companies, makes the enforcement of truthful disclosure based on ex post verification prohibitively expensive.

Take a manufacturer of personal computer (desktops and laptops), for example. A surge in demand for laptops could indicate an increase in demand for all personal computers (k > 0). It could also reflect a shift in consumer demand from desktops to laptops (k < 0).

When k = −1, asymmetric information with respect to demand does not lead to asymmetric information about firm value (this will become clear from later analysis in the paper); thus this special case is excluded from the analysis.

Lack of reliability can result from one of the following two conditions: (1) uncertainty regarding whether the management possesses superior information and (2) uncertainty regarding whether such superior information can be verifiably communicated. Although this paper focuses on the latter, the results can be derived with either one of the above conditions, as long as there is a nontrivial probability that management can credibly communicate such information.

Note that the usual criteria of Pareto efficiency is not used in this paper. Prior studies (e.g., Demski 1974) have shown that, since alternative accounting standards often lead to different wealth distributions among individuals, using the criterion of strict Pareto improvement often does not yield much insight when comparing alternative accounting standards. The measure of social welfare used in (2) is equivalent to measuring the ex ante average welfare of society.

Using other functional forms such as \(\mu (E[\widetilde{y}_{t+1} | \Upomega _{1t}]-E[\widetilde{y}_{t+1} |\Upomega _{t},R_{t}^{m}])^{2}\) can yield additional interesting results such as firms having incentives to voluntarily disclose when mandatory disclosure provides the "wrong" signal.

Note that the function in (3) does not equal the expected cash flows in t + 1. The two differ by a constant that is a function of σ _q ² .

This is consistent with the result of Clinch and Verrecchia (1997): nondisclosure equilibrium occurs only in the very extreme.

When k > 0, correlation between products will exacerbate the informed firm’s tendency to voluntarily disclose, increasing the likelihood of fully revealing equilibrium.

Note that when \(\delta _{\alpha }\notin \Upomega _{t}, \) auditors will ensure that the disclosure is consistent with the verifiable information β.

For arguments in favor of such an accounting approach, see Wallman (1995).

For example, to value stock options, the accounting rules do not specify exactly how to forecast future stock volatility. Instead, managers are supposed to come up with their best estimates.

Note, of course, that ex post verification is needed for such a scheme to work.

Casual observations suggests that firms often change the format, content, and even “tone” of their disclosure from quarter to quarter.

Note that only the mandatorily disclosed accounting measure β is used in the calculation of price relevance, which is consistent with the implementation of empirical studies on this subject. If we also include the voluntary disclosure in the calculation of \(Corr(\Updelta P_{t},R_{t}), \) then the price relevance would be equal across two accounting regimes.

See Basu (1997) for further discussions of accounting conservatism and the asymmetric timeliness of gain versus loss recognition.

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Titel: Information relevance, reliability and disclosure
verfasst von: Xiao-Jun Zhang
Publikationsdatum: 01.03.2012
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 1/2012
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-011-9170-7

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