No abstract

This paper investigates the relation between disclosure policy and market liquidity. Our tests examine two key aspects of market liquidity, the effective bid‐ask spread and quoted depth, and how they relate to financial analysts' ratings of firms' disclosure policies. We introduce a method of combining order sizes and depth quotes to yield more precise estimates of effective spreads on trades likely constrained by quoted depth. We find that while firms with higher rated disclosures are charged lower effective spreads, they are also quoted lower depth, consistent with the notion that better disclosures reduce information asymmetry but also cause some liquidity suppliers to exit the market. Therefore, a simple examination of spreads and depths yields ambiguous inferences on the relation between disclosure policy and market liquidity. We resolve this ambiguity by estimating depth‐adjusted effective spreads, and find that firms with higher rated disclosures have lower depth‐adjusted effective spreads across all trade sizes. Consequently, our results reveal a robust inverse relation between disclosure ratings and effective trading costs. This implies that a policy of enhanced financial disclosure is related to improved market liquidity.

This paper provides empirical evidence on the association between audit committee formation and the quality of accounting earnings. The audit committee is responsible for overseeing the jnancial reporting and auditing process of the j r m . This paper assesses the eflectiveness of the audit committee in discharging these responsibilities by comparing the quality, or informativeness, of earnings reports before and after audit committee formation. For this paper, informativeness is measured by the extent to which the market reacts to the release of earnings reports. Economic theory predicts that the magnitude of the market's reaction to earnings is a nondecreasing function of earnings quality. The results show a signiJicant increase in the market's reaction to earnings reports subsequent to the formation of the audit committee. SpeciJically, the reaction to earnings reports is more than 20 percent greater after the forniatiorr of the committee than before. These findings are robust to alternative variations in the research design. Overall, the evidence is consistent with the audit committee providing meaningful oversight of the jnancial reporting and auditing process.

No abstract

Valuation theory recognizes that the relation between eamings innovations and changes in security valuation is increasing in the persistence of the eamings innovations. Analyses in this article reveal that the present value of revisions in expected future benefits is a function of the length of revision honzon, suggesting that eamings persistence is determined, in part, by an entity's going-concem status. These analyses predict an inverse relation between eamings informativeness and an entity's probability of termination. Drawing on a sample of quarterly eamings and retums data from more than 1,500 distinct firms for the period 1981-1990, a statistically significant inverse relation is documented between an entity's probability of termination and the informativeness of eamings-the latter measured as the coefficient from a regression of retums on earnings. Further empirical analyses reveal that this result is a pervasive economic phenomenon not attributable to extreme conditions or other prevailing explanations of eamings informativeness. This inference is robust to variations in research design, including measurement of eamings informativeness and of termination probability and altemative specifications of the relation between retums and eamings. Consequently, the evidence in this article is consistent with a fundamental role for an entity's going-concern status in determining the usefulness of earnings.Resume. La theone de revaluation reconnait Ie fait que la relation entre les nouvelles informations relatives au benefice net et les changements dans revaluation des titres s'intensifie lorsque persistent lesdites informations, Les analyses rdalisees par les auteurs rdvfelent que la valeur actualisee des rajustements dans les gains futurs esperes depend de l'horizon du rajustement, ce qui donne ^ penser que la persistance du benSfice net est en partie fonction de la continuite de I'exploitation de l'entreprise, Selon ces analyses, le potentiel informatif du benefice net devrait etre en relation inverse avec la probabilitd de fermeture de l'entit^. En s'appuyant sur un 6chantillon de donn6es trimestnelles relatives au ben6fice net et au rendement recueillies aupres de plus de 1500 entreprises distinctes pour la periode 1981-1990, les auteurs observent une relation inverse statistiquement significative entre la probabilite de fermeture d'une entit6 et le potentiel informatif du benefice-ce demier 6tant mesure sous forme de coefficient, au moyen d'une regression des rendements sur les b^nSfices. D'autres analyses empiriques r^vfelent que cette conclusion est un ph^nomene 6conomique r^pandu qui n'est pas attribuable h. des conditions extremes ou & d'autres explications predominantes du potentiel informatif du benefice net. Cette inference resiste aux variations dans Ie plan de recherche, y compns la mqsure 252 Contemporary Accounting Research du potentiel informatif du ben6fice net et de la probabilite de fermeture, et les autres caracteristiques possibles de la relation entre le rendement et le benefice. Les r6sultat...