The association between selected corporate attributes and management incentives for voluntary accounting disclosure

Abstract

A major argument in favor of the regulation of accounting standards is that voluntarily disclosure alone is not able to enhance public welfare. This research has examined the incentives of those who do voluntarily disclose accounting information when not mandated to do so. According to the major theory of this research, signaling theory, managers of higher quality firms have incentives to signal to the market their higher quality to distinguish themselves from average or lower quality firms. One form of signaling is voluntary disclosure of information about a firm's operation. Signaling theory is tested in two voluntary accounting disclosure scenarios: release of line of business data, and disclosure of management forecasts. The research design features both a market response analysis, to determine how the market perceives the disclosure signals of management, and a cross-sectional analysis which compares firm attributes of disclosing firms. Three competing hypotheses: a) lack of full disclosure, b) differential proprietary costs, and c) expected changes in financing, production, and investment decisions, which offer alternative explanations are also examined. The expected finding that disclosing firms are better stock market performers than nondisclosing firms was not supported by tests of abnormal returns, security return deviations, and beta values. It appears the market makes no measureable distinction between the disclosure act and the content of this disclosure. The results of cross-sectional analyses of the management forecasts and line-of-business disclosure issue indicate that there are differences of firm value characteristics between disclosing firms and nondisclosing firms, but not in all years. An even stronger finding is that disclosure appears to be accompanies by other firm dynamics. Specifically, firms which disclose do so in association with their financing, production, and investment opportunities.