Disclosure of GAAP line items in earnings announcements

Abstract

We provide new evidence on the disclosure in earnings announcements of financial statement line items prepared under Generally Accepted Accounting Principles (GAAP). First, we investigate the circumstances that might provide disincentives generally for GAAP line item disclosures. We find that managers who regularly intervene in the earnings reporting process limit disclosures at the aggregate level and in each of the financial statements so as to more effectively guide investor attention to summary financial information. Specifically, this disclosure behavior obtains when managers habitually cater to market expectations, engage in income smoothing, or use discretionary accruals to improve earnings informativeness. Second, we predict and find that the specific GAAP line items that firms choose to disclose are determined by the differential informational demands of their economic environment, consistent with incentives to facilitate investor valuation. However, these valuation-related disclosure incentives are muted when managers habitually intervene in the earnings reporting process.

An Incomplete Audit at the Earnings Announcement: Implications for Financial Reporting Quality and the Market's Response to Earnings

“…Given that Schroeder () demonstrates that the level of earnings announcement GAAP financial statement disclosure is associated with abnormal returns, it is important to control for differential GAAP disclosures to test our predictions of a differential response due to perceived concerns about financial reporting quality. We include two‐ and three‐way interactions with the D'Souza et al () earnings announcement GAAP disclosure ratio, which represents the ratio of total GAAP line items disclosed in the earnings announcement to the total GAAP line items that are subsequently disclosed in the 10‐K filing ( DISCRATIO ) . Finally, we include industry and year fixed effects to control for industry‐wide and year‐specific macroeconomic effects.…”

A New Measure of Disclosure Quality: The Level of Disaggregation of Accounting Data in Annual Reports

“…We develop a new measure of disclosure quality, DQ, which captures the level of disaggregation of accounting line items in firms’ annual reports, with greater disaggregation indicating higher disclosure quality. This measure is based on the premise that more detailed disclosure gives investors and lenders more information for valuation (Fairfield, Sweeney, and Yohn [], Jegadeesh and Livnat []) and a higher level of disaggregation enhances the credibility of firms’ financial reports (Hirst, Koonce, and Venkataraman [], D'Souza, Ramesh, and Shen []).…”

“…Issuing a disaggregated forecast constrains earnings management opportunities, and leads to a perception of higher quality financial reporting and thus enhances the credibility of the earnings forecasts. In a similar vein, D'Souza, Ramesh, and Shen [] find that opportunistic managers tend to limit GAAP line item disclosures in their earnings releases, and tend to provide more aggregated data in earnings announcements in order to guide investor attention to the bottom line numbers. In a segment reporting setting, Berger and Hann [,] find that firm managers have incentives to conceal bad performance by aggregating segments incurring losses with profitable segments in order to avoid shareholder scrutiny.…”

“…More detailed disclosure reduces information asymmetry, arguably increases the precision of the information in the financial statements, and provides investors with more information for valuation and mitigates mispricing (Fairfield, Sweeney, and Yohn [], Jegadeesh and Livnat []). Greater disaggregation also enhances the credibility of firms’ financial report as it gives managers fewer degrees of freedom to manage the reported numbers (Hirst, Koonce, and Venkataraman [], D'Souza, Ramesh, and Shen []), enhancing the contracting and stewardship role of accounting information. Reasoning along this line, we argue that a greater degree of disaggregation represents higher disclosure quality.…”

Earnings Announcement Disclosures and Changes in Analysts' Information

“…Our analyses so far are based upon indicator variables ( BS , SCF , SEG and MEF ) that identify the presence or absence of a disclosure in earnings announcements. We also examine multiple alternative disclosure measures that further take into account disclosure quality: For the balance sheet and cash flow statement disclosures, we create alternative measures ( BS_ALT and SCF_ALT ) which are defined as the number of line items in the disclosure included in the earnings announcement divided by the number of line items in the same disclosure included in the subsequent 10‐K/Q filing (see D'Souza, Ramesh, and Shen ) . We also include the number of line items in the income statement disclosed in the earnings announcement divided by the number of line items in the income statement disclosed in the subsequent 10‐K/Q filing ( IS_#LINES ) as an additional control variable. We construct an alternative measure of management earnings forecasts ( MEF_ALT ) based upon forecast precision, which equals 4 for a point forecast, 3 for a range forecast, 2 for single‐bound forecast, 1 for a qualitative forecast, and 0 if no forecast is provided .…”