nach oben

Review of Accounting Studies

Erschienen in:

19.07.2018

Increased mandated disclosure frequency and price formation: evidence from the 8-K expansion regulation

verfasst von: Jeff L. McMullin, Brian P. Miller, Brady J. Twedt

Erschienen in: Review of Accounting Studies | Ausgabe 1/2019

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

Regulators claim that increased mandated disclosure frequency should lead to more efficient price formation. However, analytical models suggest that mandating disclosure may actually impede the price formation process, and prior empirical studies have been unable to document a relation between mandatory disclosure and improved price formation. We re-examine this relationship using a recent SEC regulation that increased the frequency of mandated event disclosures in form 8-K. We show that price formation improves after the mandate, where firms with the largest increases in mandatory disclosure experience the greatest improvements in price formation. Our evidence is consistent with the idea that mandating an increase in the frequency that material events must be disclosed is associated with improved price formation.

Nächster Artikel Quality minus junk

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

We define price formation as the speed with which information is incorporated into a firm’s stock price. Following prior research (e.g., Butler et al. 2007; Bushman et al. 2010), we measure price formation using intraperiod timeliness (IPT). We provide a detailed description of how this measure is calculated along with illustrative examples in the internet appendix.

See Pastena (1979), Carter and Soo (1999), and Lerman and Livnat (2010) for background on the mandated changes to 8-K regulation over the past several decades.

There is also a large literature that uses 8-K filings to examine market reactions to specific events. Examples include (1) Schwartz and Soo (1996), Ettredge et al. (2001), and Whisenant et al. (2003) for auditor change announcements; (2) Chambers and Penman (1984), Easton and Zmijewski (1989), and Collins and Hribar (2000) for earnings; and (3) Feldman et al. (2008) for nonreliance on previously issued financial statements. The focus of these studies is primarily the short-term reactions to the disclosed events.

As discussed in Section 4 of the internet appendix, we provide evidence consistent with the notion that the firms most impacted by the regulation (i.e., those that had the largest increase in disclosure) had the highest pre-regulation levels of proprietary costs.

Consistent with the limited investor response to 10-Q/K filings, in untabulated tests we fail to find evidence of a significant impact of the regulation on IPT in the 14-day window after the EAD and leading up to the 10-K/Q. This lack of evidence in this short window is consistent with Lerman and Livnat’s (2010) analysis, which finds no reduction in periodic filings’ information content after the regulation and provides support for our use of the earnings announcement as the end point of our price formation window.

This is also consistent with firms perceiving these newly mandated disclosures as providing minimal benefits. Specifically, a firm’s decision not to voluntarily disclose these items in the pre-regulation period may be driven by the belief that the disclosures provide insufficient benefits, relative to the costs associated with making those disclosures (Leuz and Wysocki 2016).

Gigler and Hemmer (1998) model a periodic disclosure framework, where they predict that mandating more frequent interim reports may lead to reductions in voluntary disclosures, due to an overall increase in the cost of disclosure (e.g., production costs). They suggest that, because voluntary disclosures are often more precise indicators of firm value, mandating disclosure could actually lead to a reduction in price-informativeness. Consistent with this crowding out notion, a concurrent study by Noh et al. (2017) provides evidence that the 2004 8-K mandate results in a significant decrease in voluntary disclosure.

To properly interpret the IPT measure, it is important to use an endpoint culminating with the release of the summary information for the quarter. Following Bushman et al. (2010), we use the earnings announcement as our endpoint, because it provides a common and meaningful date across all firms where a significant amount of information becomes public. In addition, we select the earnings announcement, rather than the 10-Q/K, as research has shown that there is little to no average market reaction to these periodic filings (Li and Ramesh 2009). To reduce the likelihood that prior-period earnings information is affecting the measure, we eliminate any firm-quarters from our sample where a prior-period earnings announcement is made during the 63-trading-day window.

More detail on the calculation of IPT along with illustrative examples can be found in the internet appendix.

As evidence of this large increase, we find that, for our sample firms, the total number of 8-K items issued per year nearly doubled from 121,314 before the regulation to 223,878 after the regulation (untabulated).

We use the highest and lowest terciles to ensure that the regulation had distinct impacts on the high and low impact firms. In addition, as noted, our tests focus on the four quarters on either side of the regulation. Bertrand et al. (2004) raise a potential concern that serial correlation may affect the standard errors when using multiple observations in the pre and post period. To address this concern we perform a robustness test (untabulated), where, for each firm, we average together the four quarters of data before and the four quarters after the regulation to create a single variable for each of the pre and post periods. We then re-run our primary analyses using this substantially reduced sample and find that the significance and economic magnitude of the coefficients are unaffected.

In addition to these primary controls, the internet appendix provides results showing that our findings are robust to controlling for potential changes in the timeliness or textual and numeric content of 8-K disclosures.

In untabulated tests, we cluster standard errors by year-quarter and find this does not affect our results.

Although there is potential for noise in the IPT measure, there is no reason to expect this noise to introduce any type of bias into our inferences. In Section 5.4, we provide evidence that our results are robust to alternative methods of addressing outliers, including retaining the extreme observations with studentized residuals greater than two or using a decile-ranked version of IPT.

This estimate is derived by combining the coefficient estimate on Post with the intercept value of 36.912 (untabulated). Results are nearly identical if industry fixed effects are omitted.

In the internet appendix, we provide a series of tests (i.e., placebo tests and quarter-by-quarter tests) that show our results are unique to the period surrounding the passage of the regulation.

Results are robust to using the full, nonweighted sample of high and low impact firms (untabulated).

These effects are derived by combining the applicable coefficient estimates with the intercept value of 29.877 (untabulated). Results are nearly identical if industry fixed effects are omitted.

In Section 5.5, we perform additional cross-sectional analyses to better understand whether the regulation differentially impacted firms with high and low institutional ownership.

Appendix A provides a summary of item descriptions. As previously discussed, the numbering scheme changed with the regulation. The excluded 8-K filing numbers are based on the new numbering system, while 8-K filed during the pre-regulation period were adjusted to match the corresponding post-regulation classifications.

See Griliches and Hausman (1986), Angrist and Pischke (2009), McKinnish (2008), and Gormley and Matsa (2014).

Specifically, during the 63-trading day-window with which we measure IPT, a lack of any price response until the end of earnings announcement window would result in an IPT value of 0, while an immediate and complete price response on the first day of the quarter, with no subsequent change in price, would result in an IPT value of 62.5.

The results reported in Panel B of Table 6 demonstrate that our results are not driven by the inclusion/exclusion of potential extreme observations. Not surprisingly, when extreme observations are included, the coefficient on the interaction term in the first column of Table 6 Panel B is larger than the coefficient reported in Panel B of Table 3, where these extreme observations are excluded. We also note that the difference in the coefficient magnitudes across the columns of Table 6 Panel B is largely attributable to the difference in dependent variables (continuous measure of IPT versus decile-ranked measure).

Negative IPT values correctly capture the underlying economics of slower price formation, where returns at the beginning of the period are negative (positive) and then toward the end of the period flip, to result in an overall positive (negative) quarterly return. In contrast, the economic interpretation of IPT values above 62.5 is less clear. As such, we also re-run (untabulated) our analysis after removing only those observations with IPT values above 62.5 and find that the coefficient on Post*High_Impact is positive and significant (t-statistic of 2.251).

Allee, K., DeAngelis, M., & Moon, J. (2018). Disclosure ‘Scriptability’. Forthcoming in Journal of Accounting Research.

Angrist, J. D., & Pischke, J. (2009). Mostly harmless econometrics: An empiricist’s companion. Princeton: Princeton University Press.

Bertrand, M., Duflo, E., & Mullainathan, S. (2004). How much should we trust differences-in-differences estimates? Quarterly Journal of Economics, 119, 249–275.CrossRef

Beyer, A., Cohen, D., Lys, T., & Walther, B. (2010). The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics, 50, 296–343.CrossRef

Bloomfield, R. (2002). The “Incomplete Revelation Hypothesis” and financial reporting. Accounting Horizons, 16, 233–243.CrossRef

Bushman, R., Smith, A., & Wittenberg-Moerman, R. (2010). Price discovery and dissemination of private information by loan syndicate participants. Journal of Accounting Research, 48, 119–132.CrossRef

Butler, M., Kraft, A., & Weiss, I. (2007). The effect of reporting frequency on the timeliness of earnings: The cases of voluntary and mandatory interim reports. Journal of Accounting and Economics, 43, 181–217.CrossRef

Carter, M., & Soo, B. (1999). The relevance of form 8-K reports. Journal of Accounting Research, 37, 119–132.CrossRef

Chambers, A., & Penman, S. (1984). Timeliness of reporting and the stock price reaction to earnings announcements. Journal of Accounting Research, 22, 21–47.CrossRef

Collins, D., & Hribar, P. (2000). Earnings-based and accrual-based market anomalies: One effect or two? Journal of Accounting and Economics, 29, 101–123.CrossRef

Cuijpers, R., & Peek, E. (2010). Reporting frequency, information precision and private information acquisition. Journal of Business Finance & Accounting, 37, 27–59.CrossRef

Drake, M., Thornock, J., & Twedt, B. (2017). The internet as an information intermediary. Review of Accounting Studies, 22, 543–576.CrossRef

Easton, P., & Zmijewski, M. (1989). Cross-sectional variation in the stock market response to the announcement of accounting earnings. Journal of Accounting and Economics, 11, 117–142.CrossRef

Ernstberger, J., Link, B., Stich, M., & Vogler, O. (2017). The Real Effects of Mandatory Quarterly Reporting. The Accounting Review, 92, 33–60.CrossRef

Ettredge, M., Smith, D., & Stone, M. (2001). How effective is joint public and private monitoring? The case of the AICPA auditor change notification letter. Auditing: A Journal of Practice & Theory, 20, 29–43.CrossRef

Feldman, R., Livnat, J., & Segal, B. (2008). Shorting companies with unreliable financial statements. Journal of Investing, 17, 6–15.CrossRef

Fu, R., Kraft, A., & Zhang, H. (2012). Financial reporting frequency, information asymmetry, and the cost of equity. Journal of Accounting and Economics, 54, 132–149.CrossRef

Fu, R., Gao, F., Kim, Y., & Qiu, B. (2017). Performance volatility, information availability, and disclosure reforms. Journal of Banking & Finance, 75, 35–52.CrossRef

Gleason, C., & Lee, C. (2003). Analyst forecast revisions and market price discovery. The Accounting Review, 78, 193–225.CrossRef

Gigler, F., & Hemmer, T. (1998). On the frequency, quality, and informational role of mandatory financial reports. Journal of Accounting Research, 36, 117–147.CrossRef

Gigler, F., & Hemmer, T. (2001). Conservatism, optimal disclosure policy, and the timeliness of financial reports. The Accounting Review, 76, 471–494.CrossRef

Gormley, T. A., & Matsa, D. A. (2014). Common Errors: How to (and Not to) Control for Unobserved Heterogeneity. The Review of Financial Studies, 27, 617–661.CrossRef

Griliches, Z., & Hausman, J. (1986). Errors in Variables in Panel Data. Journal of Econometrics, 31, 93–118.CrossRef

Hainmueller, J. (2012). Entropy balancing for causal effects: A multivariate reweighting method to produce balanced samples in observational studies. Political Analysis, 20, 25–46.CrossRef

Kajuter, P., Klassmann, F. & Nienhaus, M. (2016). The Effect of Mandatory Quarterly Reporting on Firm Value and Liquidity: Evidence from a Quasi-Natural Experiment in Singapore. University of Muenster. Working paper.

Kraft, A., Vashishtha, R., & Venkatachalam, M. (2017). Frequent Financial Reporting and Managerial Myopia. The Accounting Review, forthcoming.

Lang, M., & Lundholm, R. (1993). Cross-Sectional Determinants of Analyst Ratings of Corporate Disclosures. Journal of Accounting Research, 31, 246–271.CrossRef

Lee, Y. (2012). The effect of quarterly report readability on information efficiency of stock prices. Contemporary Accounting Research, 29, 1137–1170.CrossRef

Lerman, A., & Livnat, J. (2010). The new form 8-K disclosures. Review of Accounting Studies, 15, 752–778.CrossRef

Leuz, C., & Wysocki, P. (2016). Economics of disclosure and financial reporting regulation: evidence and suggestions for future research. Journal of Accounting Research, 54, 525–622.CrossRef

Li, E., & Ramesh, K. (2009). Market reaction surrounding the filing of periodic SEC reports. The Accounting Review, 84, 1171–1208.CrossRef

Leftwich, R., Watts, R., & Zimmerman, J. (1981). Voluntary corporate disclosure: the case of interim reporting. Journal of Accounting Research, 19, 50–77.CrossRef

McKinnish, T. (2008). Panel data models and transitory fluctuations in the explanatory variable. In D. L. Millimet, J. A. Smith, & E. J. Vytlacil (Eds.), Modeling and evaluating treatment effects in econometrics (pp. 335–358). Amsterdam: Elsevier.CrossRef

McMullin, J., & Schonberger, B. (2017). Entropy-balanced discretionary accruals. Indiana University and University of Rochester. Working paper.

McNichols, M., & Manegold, G. (1983). The effect of the information environment on the relationship between financial disclosure and security price variability. Journal of Accounting and Economics, 5, 49–74.CrossRef

Miller, B. (2010). The effects of reporting complexity on small and large investor trading. The Accounting Review, 85, 2107–2143.CrossRef

Noh, S., So, E., & Weber, J. (2017) Switching from Voluntary to Mandatory Disclosure: Do Managers View Them as Substitutes? MIT Sloan. Working paper.

Pastena, V. (1979). Some Evidence on the SEC's System of Continuous Disclosure. The Accounting Review, 54, 776–783.

Schwartz, K., & Soo, B. (1996). Evidence of regulatory noncompliance with SEC disclosure rules on auditor changes. The Accounting Review, 71, 555–572.

Securities and Exchange Commission (1982). Accounting series release No. 306: Adoption of integrated disclosure system. Washington D.C.

Securities and Exchange Commission (2004). Final rule: Additional Form 8-K disclosure requirements and acceleration of filing date. Washington D.C. https://www.sec.gov/rules/final/33-8400.htm

Securities and Exchange Commission (2013). The investor’s advocate: How the SEC protects investors, maintains market integrity, and facilitates capital formation. Washington D.C. Modified June 10, 2013. https://www.sec.gov/Article/whatwedo.html

Simon, H. (1955). A behavioral model of rational choice. Quarterly Journal of Economics, 69, 99–118.CrossRef

Twedt, B. (2016). Spreading the word: Price discovery and newswire dissemination of management earnings guidance. The Accounting Review, 91, 317–346.CrossRef

Van Buskirk, A. (2012). Disclosure frequency and information asymmetry. Review of Quantitative Finance and Accounting, 38, 411–440.CrossRef

Verrecchia, R. (1983). Discretionary disclosure. Journal of Accounting and Economics, 5, 365–380.CrossRef

Whisenant, S., Sankaraguruswamy, S., & Raghunandan, K. (2003). Market reactions to disclosure of reportable events. Auditing: A Journal of Practice & Theory, 22, 181–194.CrossRef

You, H., & Zhang, X. (2009). Financial reporting complexity and investor under-reaction to 10-K information. Review of Accounting Studies, 14, 559–586.CrossRef

Zhang, Q., Cai, C., & Keasey, K. (2013). Market reaction to earnings news: A unified test of information risk and transaction costs. Journal of Accounting and Economics, 56, 251–266.CrossRef

Titel: Increased mandated disclosure frequency and price formation: evidence from the 8-K expansion regulation
verfasst von: Jeff L. McMullin
Brian P. Miller
Brady J. Twedt
Publikationsdatum: 19.07.2018
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 1/2019
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-018-9462-2

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 1/2019

Tax-related mandatory risk factor disclosures, future profitability, and stock returns

Disclosure and the outcome of securities litigation

Quality minus junk

The effect of major customer concentration on firm profitability: competitive or collaborative?

Ideological diversity in standard setting

Correction to: The impact of large tax settlement favorability on firms’ subsequent tax avoidance