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The effect of earnings characteristics on firms' discretionary disclosure decisions

Author

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  • William Wilcox
  • Kevin Thomas Berry
  • Yonpae Park
  • Mitchell Raiborn

Abstract

This study examines whether firms expand accounting disclosures in response to perceived market undervaluation. Using a signalling theory framework, this paper predicts that managers will use disclosures to align the market's expectations about future earnings performance with their own. We predict that the market undervalues firms with positive (negative) abnormal earnings when the persistence of the abnormal earnings is higher (lower) than market expectations. Therefore, these firms will signal to the market by expanding their accounting disclosures. Furthermore, firms with positive and negative abnormal growth are expected to seek different types of disclosures to correct the perceived undervaluation. Our findings demonstrate that a relationship exists between the persistence of the earnings components and firms' changes in discretionary disclosures, suggesting that characteristics of corporate earnings are associated with changes in disclosure decisions. Therefore, any analysis of the benefits to expanded disclosures should also consider the characteristics of the reported earnings.

Suggested Citation

  • William Wilcox & Kevin Thomas Berry & Yonpae Park & Mitchell Raiborn, 2010. "The effect of earnings characteristics on firms' discretionary disclosure decisions," International Journal of Accounting and Finance, Inderscience Enterprises Ltd, vol. 2(2), pages 131-155.
    • Handle: RePEc:ids:intjaf:v:2:y:2010:i:2:p:131-155
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    Cited by:

    1. James G.S. Yang & Wing W. Poon & Leonard J. Lauricella, 2016. "Defects in foreign tax credit rules," International Journal of Accounting and Finance, Inderscience Enterprises Ltd, vol. 6(1), pages 24-42.

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