The Complementary Roles of Audited Financial Reporting and Voluntary Disclosure: A Test of the Confirmation Hypothesis

We examine the complementarity between voluntary disclosure and reporting audited financial statement outcomes. We test the “confirmation” hypothesis, that reporting audited, backward-looking outcomes disciplines and hence enhances the precision and credibility of managers’ disclosure of private forward-looking information. Using management earnings forecasts as the voluntary disclosure variable, we report that committing to higher audit fees (a measure of the extent of financial statement verification and thus the accuracy and freedom from manipulation of reported outcomes), is associated with more frequent and more specific management forecasts, and with a larger market reaction to forecasts. These relations are not driven by litigation risk and are robust to a variety of controls. Disclosure of private information and audited financial reporting play complementary roles, which implies they cannot be evaluated separately.

[1]  Jonathan L. Rogers,et al.  Earnings Guidance and Market Uncertainty , 2009 .

[2]  Jonathan L. Rogers.  Disclosure Quality and Management Trading Incentives , 2008 .

[3]  Jonathan L. Rogers,et al.  Shareholder Litigation and Changes in Disclosure Behavior , 2008 .

[4]  C. Lennox,et al.  Audit effort and earnings management , 2008 .

[5]  Alexander J. Triantis,et al.  Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations , 2008 .

[6]  Lisa Koonce,et al.  Management Earnings Forecasts: A Review and Framework , 2008 .

[7]  R. Ball,et al.  Is financial reporting shaped by equity markets or by debt markets? An international study of timeliness and conservatism , 2007 .

[8]  Ross L. Watts,et al.  Positive Accounting Theory , 2006 .

[9]  R. Ball,et al.  Earnings Quality at Initial Public Offerings , 2006 .

[10]  Mei Feng,et al.  Does Earnings Guidance Affect Market Returns? The Nature and Information Content of Aggregate Earnings Guidance , 2006 .

[11]  Terrance R. Skantz,et al.  Audit and Nonaudit Fees and the Market's Reaction to Earnings Announcements , 2006 .

[12]  C. Leuz,et al.  The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms , 2006 .

[13]  Susan G. Watts,et al.  Financial Reporting and Supplemental Voluntary Disclosures , 2006 .

[14]  Michelle Lowry,et al.  Does Disclosure Deter or Trigger Litigation? , 2005 .

[15]  R. Ball,et al.  EARNINGS QUALITY IN UK PRIVATE FIRMS: COMPARATIVE LOSS RECOGNITION TIMELINESS , 2005 .

[16]  N. Vafeas,et al.  The Association between Corporate Boards, Audit Committees, and Management Earnings Forecasts: An Empirical Analysis , 2005 .

[17]  Eti Einhorn,et al.  The Nature of the Interaction between Mandatory and Voluntary Disclosures , 2004 .

[18]  Sanjeev Bhojraj,et al.  The Association between Outside Directors, Institutional Investors and the Properties of Management Earnings Forecasts , 2004 .

[19]  David F. Larcker,et al.  Fees Paid to Audit Firms, Accrual Choices, and Corporate Governance , 2004 .

[20]  Karla M. Zehms,et al.  Earnings Manipulation Risk, Corporate Governance Risk, and Auditors' Planning and Pricing Decisions , 2004 .

[21]  Wayne R. Landsman,et al.  Has the Information Content of Quarterly Earnings Announcements Declined in the Past Three Decades , 2002 .

[22]  Marilyn F. Johnson,et al.  The Impact of Securities Litigation Reform on the Disclosure of Forward-Looking Information by High Technology Firms , 2001 .

[23]  Wayne R. Landsman,et al.  Auditors' Perceived Business Risk and Audit Fees: Analysis and Evidence , 2001 .

[24]  Joseph P. H. Fan,et al.  Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia , 2001 .

[25]  R. Ball.  Infrastructure Requirements for an Economically Efficient System of Public Financial Reporting and Disclosure , 2001 .

[26]  Mary E. Barth,et al.  The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting: Another View , 2001 .

[27]  Ross L. Watts,et al.  The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting , 2000 .

[28]  Phillip C. Stocken.  Credibility of Voluntary Disclosure , 2000 .

[29]  Joseph V. Carcello,et al.  Board Characteristics and Audit Fees , 2000 .

[30]  Susan Z. Shu,et al.  Auditor resignations: clientele effects and legal liability☆ , 2000 .

[31]  Badi H. Baltagi,et al.  UNEQUALLY SPACED PANEL DATA REGRESSIONS WITH AR(1) DISTURBANCES , 1999, Econometric Theory.

[32]  Russell J. Lundholm.  Historical Accounting and the Endogenous Credibility of Current Disclosures , 1999 .

[33]  Michael Willenborg.  Empirical Analysis of the Economic Demand for Auditing in the Initial Public Offerings Market , 1999 .

[34]  S. P. Kothari,et al.  The Effect of International Institutional Factors on Properties of Accounting Earnings , 1999 .

[35]  Robert E. Verrecchia,et al.  The Economic Consequences of Increased Disclosure , 1999 .

[36]  J. Coffee.  The Future as History: The Prospects for Global Convergence in Corporate Governance and its Implications , 1999 .

[37]  C. Manzano.  Price-signal relations in an imperfectly competitive financial market with public and private information , 1999 .

[38]  George P. Baker,et al.  CEO Incentives and Firm Size , 1998, Journal of Labor Economics.

[39]  Chandra Kanodia,et al.  Investment and disclosure: The disciplinary role of periodic performance reports , 1998 .

[40]  Linda Smith Bamber,et al.  Discretionary management earnings forecast disclosures: Antecedents and outcomes associated with forecast venue and forecast specificity choices , 1998 .

[41]  Teri Lombardi Yohn,et al.  Management Forecasts and Information Asymmetry: An Examination of Bid-Ask Spreads , 1997 .

[42]  Michael Firth,et al.  The provision of non-audit services and the pricing of audit fees , 1997 .

[43]  Mahmoud Ezzamel,et al.  Some Empirical Evidence from Publicly Quoted UK Companies on the Relationship Between the Pricing of Audit and Non-audit Services , 1996 .

[44]  J. Hassell,et al.  Determinants of Management Forecast Precision , 1996 .

[45]  T. B. O'keefe,et al.  The Production of Audit Services: Evidence from a Major Public Accounting Firm , 1994 .

[46]  J. Francis,et al.  SHAREHOLDER LITIGATION AND CORPORATE DISCLOSURES , 1994 .

[47]  Douglas J. Skinner.  WHY FIRMS VOLUNTARILY DISCLOSE BAD-NEWS , 1994 .

[48]  Ronald A. Dye,et al.  Auditing Standards, Legal Liability, and Auditor Wealth , 1993, Journal of Political Economy.

[49]  Robert E. Verrecchia,et al.  Disclosure, Liquidity, and the Cost of Capital , 1991 .

[50]  Srikant M. Datar,et al.  The role of audits and audit quality in valuing new issues , 1991 .

[51]  Raffi J. Indjejikian,et al.  The Impact Of Costly Information Interpretation On Firm Disclosure Decisions , 1991 .

[52]  Robert M. Bushman,et al.  Public Disclosure and the Structure of Private Information Markets , 1991 .

[53]  A. Rashad Abdel-Khalik,et al.  The Jointness of Audit Fees and Demand for MAS: A Self-Selection Analysis , 1990 .

[54]  Robert E. Verrecchia.  Information quality and discretionary disclosure , 1990 .

[55]  Russell J. Lundholm.  Price-Signal Relations In The Presence Of Correlated Public And Private Information , 1988 .

[56]  Sheridan Titman,et al.  Information quality and the valuation of new issues , 1986 .

[57]  Zoe-Vonna Palmrose,et al.  The Effect of Nonaudit Services on the Pricing of Audit Services , 1986 .

[58]  Douglas W. Diamond.  Optimal Release of Information By Firms , 1985 .

[59]  Gregory B. Waymire.  Earnings Volatility And Voluntary Management Forecast Disclosure , 1985 .

[60]  Dan A. Simunic,et al.  Auditing, Consulting, And Auditor Independence , 1984 .

[61]  Gregory B. Waymire.  ADDITIONAL EVIDENCE ON THE INFORMATION-CONTENT OF MANAGEMENT EARNINGS FORECASTS , 1984 .

[62]  Ross L. Watts,et al.  Agency Problems, Auditing, and the Theory of the Firm: Some Evidence , 1983, The Journal of Law and Economics.

[63]  J. Sobel,et al.  STRATEGIC INFORMATION TRANSMISSION , 1982 .

[64]  L. DeAngelo,et al.  Auditor size and audit quality , 1981 .

[65]  D. Simunic.  The Pricing Of Audit Services - Theory And Evidence , 1980 .

[66]  Stephen H. Penman,et al.  An Empirical-Investigation Of The Voluntary Disclosure Of Corporate-Earnings Forecasts , 1980 .

[67]  J. Patell.  CORPORATE FORECASTS OF EARNINGS PER SHARE AND STOCK-PRICE BEHAVIOR - EMPIRICAL TESTS , 1976 .

[68]  M. Spence.  Job Market Signaling , 1973 .

[69]  George Foster,et al.  Stock Market Reaction To Estimates Of Earnings Per Share By Company Officials , 1973 .

[70]  G. Fisher.  Endogenous and Exogenous Investment in Macro-Economic Models , 1953 .

[71]  K. Lai.  Does Audit Quality Matter More for Firms with High Investment Opportunities , 2009 .

[72]  Thomas Hemmer,et al.  On the frequency, quality, and informational role of mandatory financial reports , 1998 .

[73]  Maureen F. McNichols,et al.  Discretionary Disclosure and External Financing , 1995 .

[74]  Robert E. Verrecchia,et al.  Market liquidity and volume around earnings announcements , 1994 .

[75]  Joel S. Demski,et al.  Market response to financial reports , 1994 .

[76]  R. Watts,et al.  Lawsuits Against Auditors , 1994 .

[77]  Michael G. Alles,et al.  On the optimality of public signals in the presence of private information , 1993 .

[78]  Robert E. Verrecchia.  Endogenous proprietary costs through firm interdependence , 1990 .

[79]  B. Lev.  ON THE USEFULNESS OF EARNINGS AND EARNINGS RESEARCH: LESSONS AND DIRECTIONS FROM TWO DECADES OF EMPIRICAL RESEARCH , 1989 .

[80]  John S. Hughes,et al.  Evidence On The Incremental Information-Content Of Additional Firm Disclosures Made Concurrently With Earnings , 1986 .

[81]  Ronald A. Dye,et al.  Proprietary and Nonproprietary Disclosures , 1986 .

[82]  Robert E. Verrecchia.  The Use of Mathematical Models in Financial Accounting , 1982 .

[83]  W. Beaver.  The Information Content Of Annual Earnings Announcements , 1968 .

[84]  R. Ball,et al.  An empirical evaluation of accounting income numbers , 1968 .