Critical Accounting Policy Disclosures

To increase investor awareness of the sensitivity of financial statements to the methods, assumptions, and estimates underlying their preparation, the Securities and Exchange Commission proposed that firms include disclosures about critical accounting policies in their 10-Ks. Using a large sample of CAP disclosures from SEC filers, we examine the extent to which CAP disclosures correlate with existing financial statement information, provide new information, and correlate with existing measures of accounting quality. We also consider strategic disclosure strategies and examine whether actual disclosures are consistent with hypotheses generated from game theoretical analyses. We provide evidence that firms disclosures confirm information provided within existing financial statements, provide incremental information. Rather than policy by policy, disclosure decisions seem to be made conditionally, using a portfolio approach.

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