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Disclosure Versus Recognition: Inferences from Subsequent Events

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  • JEREMY MICHELS

Abstract

Standard setters explicitly state that disclosure should not substitute for recognition in financial reports. Consistent with this directive, prior research shows that investors find recognized values more pertinent than disclosed values. However, it remains unclear whether reporting items are recognized because they are more relevant for investing decisions, or whether requiring recognition itself prompts differing behavior on the part of firms and investors. Using the setting of subsequent events, I identify the differential effect of requiring disclosure versus recognition in a setting where the accounting treatment of an item is exogenously determined. For comparable events, I find a stronger initial market response for firms required to recognize relative to firms that must disclose, although the large magnitude of the identified effect calls into question whether this difference can be attributed to accounting treatments alone. In examining various reasons for the stronger market response to recognized values, I fail to find support for the hypothesis that this difference is due to differential reliability of disclosed and recognized values. I do find some evidence that investors underreact to disclosed events, consistent with investors incurring higher processing costs when using disclosed information.

Suggested Citation

  • Jeremy Michels, 2017. "Disclosure Versus Recognition: Inferences from Subsequent Events," Journal of Accounting Research, Wiley Blackwell, vol. 55(1), pages 3-34, March.
    • Handle: RePEc:bla:joares:v:55:y:2017:i:1:p:3-34
    DOI: 10.1111/1475-679X.12128
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    3. Kusano, Masaki & Sakuma, Yoshihiro, 2019. "Effects of recognition versus disclosure of finance leases on audit fees and costs: Evidence from Japan," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(1), pages 53-68.
    4. Kusano, Masaki, 2018. "Effect of capitalizing operating leases on credit ratings: Evidence from Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 30(C), pages 45-56.
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    6. Jung Min Park & Hyoung Yong Lee & Sang Hyun Park & Ingoo Han, 2020. "Value Relevance of Accounts Receivable Factoring and Its Impact on Financing Strategy under the K-IFRS after COVID-19 from the Perspective of Accounting Big Data," Sustainability, MDPI, vol. 12(24), pages 1-16, December.
    7. Elizabeth Blankespoor & Ed Dehaan & John Wertz & Christina Zhu, 2019. "Why Do Individual Investors Disregard Accounting Information? The Roles of Information Awareness and Acquisition Costs," Journal of Accounting Research, Wiley Blackwell, vol. 57(1), pages 53-84, March.
    8. Wang, Yang & Ashton, John K. & Jaafar, Aziz, 2023. "Financial statement fraud, recidivism and punishment," Emerging Markets Review, Elsevier, vol. 56(C).
    9. Soon‐Yeow Phang, 2020. "Impacts of the timing of the discovery of a subsequent event on the auditors’ approach to subsequent events," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 4121-4146, December.
    10. Hsieh, Su-Jane & Liu, Shuming, 2021. "The cost-of-equity implications of off-balance sheet pension liabilities," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(1).
    11. Kusano, Masaki, 2023. "Does recognition versus disclosure of pension liabilities affect credit ratings? Evidence from Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    12. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    13. Masaki KUSANO, 2022. "Recognition versus Disclosure and Managerial Discretion: Evidence from Japanese Pension Accounting," Discussion papers e-22-008, Graduate School of Economics , Kyoto University.
    14. ILIA D. Dichev, 2021. "Re‐orienting the Statement of Cash Flows Around Cash Flows to Equity Holders," Abacus, Accounting Foundation, University of Sydney, vol. 57(3), pages 407-420, September.
    15. Christine Cuny & Omri Even‐Tov & Edward M. Watts, 2021. "From Implicit to Explicit: The Impact of Disclosure Requirements on Hidden Transaction Costs," Journal of Accounting Research, Wiley Blackwell, vol. 59(1), pages 215-242, March.
    16. Masaki KUSANO & Yoshihiro SAKUMA, 2019. "Recognition versus Disclosure and Audit Fees and Costs:Evidence from Pension Accounting in Japan," Discussion papers e-19-007, Graduate School of Economics , Kyoto University.

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