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Review of Accounting Studies

Erschienen in:

01.03.2008

Voluntary disclosure of accruals in earnings press releases and the pricing of accruals

verfasst von: Shai Levi

Erschienen in: Review of Accounting Studies | Ausgabe 1/2008

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Abstract

This study investigates firms’ decisions to disclose accruals information in earnings press releases versus to provide it only in 10-Q filings and the impact of this disclosure on the pricing of accruals. I find that firms disclose accruals in their press releases when earnings alone are a weak indication of cash flow performance and that following these disclosures the accruals information is fully impounded into stock prices. The evidence suggests that when investor demand for accruals is likely to exist and firms disclose the information in earnings press releases, the mispricing typically associated with accruals is mitigated.

Nächster Artikel An integrated analysis of the association between accrual disclosure and the abnormal accrual anomaly

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Given that proprietary and other costs of disclosing accruals 2 or 3 weeks before the 10-Q filing are low, Disclosers are expected to yield to investor demand and disclose accruals in earnings press releases. See discussion in Sect. 2 below.

For review of the literature see, for example, Kraft et al. (2006), Lev and Nissim (2006), Marshruwala et al. (2006), and Zach (2006).

Libby et al. (2002) and Daniel et al. (2002) provide further review of this literature.

The different return-reactions to Disclosers’ and Filers’ accruals over the earnings announcement and filing dates can be driven by the different quality of the firms’ accruals. Therefore, only the absence of post-disclosure returns drift for Disclosers and its existence for Filers serve as evidence for the difference in accruals mispricing.

Chen et al. (2002) find that a firm will more likely disclose balance sheet information in its earnings press releases when its book value is of greater value to the investor, as is the case for loss firms. As discussed below, there is a substantial variation in the amount of line items firms include in their earnings press releases, and the present study focuses on firms that provided balance sheet or cash flow working capital items.

Sloan (1996) reports average size-adjusted returns of more than 10% a year on an accrual-based trading strategy for the period of 1962 through 1991.

For example, Chen et al. (2002) find, for a sample of 12 quarters ending with the third quarter of 1995, that 37% of quarterly preliminary earnings announcements include balance sheets.

Cash flow information is required to accurately calculate accruals at the earnings announcement date. However, accruals can be estimated based on the change in the balance sheet’s current assets and current liabilities items—an estimation known as the “balance sheet method.” For further discussion of the difference between the balance sheet method and cash-flow-based calculations of accruals, see Collins and Hribar (2002).

Significant costs that allow firms to delay disclosure are usually associated with the uncovering of proprietary information (see, for example, the literature review in Verrecchia 2001). In contrast, the costs associated with revealing balance sheet and cash flow items in earnings press releases, just 2 or 3 weeks before the information is communicated in the mandatory 10-Q filings, are low. The disclosure costs in the latter case are the additional fees that auditors might charge for releasing balance sheet and cash flow information early.

Chen et al. (2002) also use circumstantial evidence to gauge investor demand for balance sheet information. The measures used by Chen et al. are discussed in Sect. 4.1 below.

Although value of firms can be pronounced as a function of earnings and its accrual components, it is commonly agreed that cash flows are the basic driver of valuation (e.g., see Ohlson 1995; Lev and Thiagarajan 1993).

Prior studies provide mixed evidence on whether investors react to information in 10-K and 10-Q filings. For example, Stice (1991) finds no market reaction to information in SEC filings; Easton and Zmijewski (1993) find weak evidence of returns reaction to information the filings, and Balsam et al. (2002) provide evidence that market reaction to the 10-Q exists, for a certain subset of firms at least. Therefore, there is no unconditional prior on whether investors react to information in SEC filings, and the answer to this question seems to be circumstance specific.

The sample does not include firms with SIC codes 6000–6499 (financial firms).

Louis et al. (2007) control for self-selection of firms into Disclosers and Filers with Heckman’s two-stage regression approach. Note that the explanatory power of returns drift on accruals regression, which is one of the stages required by that approach, is usually very low. Louis et al., for example, report R-square of 0.003 in their Table 7. Hence, the validity of this two-stage regression approach in this case is debatable. I choose to pursue the matched-sample approach and to test the returns drift with the standard hedgeportfolio methodology.

The fact that the sample includes only NYSE firms might explain the relatively high percentage of institutional holdings. For comparison, the Board of Governors of the Federal Reserve System reports mean institutional ownership of 54.3% for 1996 and 56.6% for 1997.

Starting the measurement a year before the sample period attempts to attain a sufficiently long time-series of data. Note that the practices of disclosing accruals early for Disclosers and disclosing it in the 10-Q filing for Filers are consistent over the sample period and may have been in place for these firms before the first year for which I collected data, 2001.

See Table 3 in Dechow and Dichev (2002).

Specifically, they find that balance sheet disclosures are more likely among firms in high technology industries that report losses, have larger forecast errors, engage in mergers or acquisitions, are younger, or have more volatile stock returns.

For robustness, the above logit analysis was also performed with dummy variables for each pair of matched observations. The results were similar to those presented in Table 5. Meaning that the results describe what drives firms of similar size that operate in the same industry to disclose accruals in press releases rather than just in 10-Q filings.

Note that when starting the accumulation of returns 3 days after the earnings press release date, instead of 6 days after the 10-Q filing date, the results for Disclosers are similar—i.e., the abnormal returns are insignificantly different from zero for each of the three accruals portfolios described in Table 6.

The calendar-time portfolio approach is robust with regard to the cross-sectional dependence of abnormal returns that are overlapping in calendar time, which might exist in my sample. For example, Mitchell and Stafford (2000) discuss differences between buy-and-hold and time-calendar portfolio approaches.

Note that when the accumulation of returns starts 3 days after the press release date, instead of 6 days after the filing date, the results stay the same; the abnormal returns on the portfolio of Disclosers are insignificantly different from zero.

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Titel: Voluntary disclosure of accruals in earnings press releases and the pricing of accruals
verfasst von: Shai Levi
Publikationsdatum: 01.03.2008
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 1/2008
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-007-9059-7

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