On the Relationship between Voluntary Disclosure, Earnings Smoothing and the Value-Relevance of Earnings: The Case of Switzerland

Abstract

This paper examines whether voluntary disclosure by Swiss firms constrains the use of discretionary accruals to smooth earnings, and explores the effect of voluntary disclosure on the value relevance of earnings. We focus on Swiss firms because Switzerland's financial reporting system provides managers with extensive discretion in corporate disclosure, and there are important variations in the level of information provided in their annual reports. We consider that managers can choose two different ways to voluntarily convey information, either through the quality and quantity of annual report disclosure or, through compliance with International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (GAAP). Relying on a simultaneous equations approach, our results suggest that Swiss firms use discretionary accruals to smooth earnings. However, this relation is reduced for firms that voluntarily disclose more information in their annual report or comply with IAS/IFRS or US GAAP. Moreover, we show that discretionary accruals of high disclosers or of firms voluntarily complying with IAS/IFRS or US GAAP receive a lower valuation weight.

Exploring the Impact of Internal Corporate Governance on the Relation Between Disclosure Quality and Earnings Management in the UK Listed Companies

“…These studies in the US, Switzerland, Tunisia and the UK capital market have consistently documented a negative relationship between disclosure quality and earnings management. In addition, Zhou and Lobo (2001) demonstrate that there is a negative bi-directional relationship between disclosure and earnings management in the US, while Lapointe-Antunes et al (2006) fail to find such two-way relationship in Switzerland. However, as mentioned before, none of these studies provides proper control for internal corporate governance variables in their models.…”

“…Literature on disclosure quality and earnings management proxies for disclosure quality ranges to AIMR ratings (Zhou and Lobo 2001), disclosure index and compliance to accounting standards (Lapointe-Antunes et al 2006;Shen and Chih 2007), voluntary disclosure (Iatridis and Kadorinis 2009) and press releases by the firms (Jo and Kim 2007;Riahi and Arab 2011) etc. These studies in the US, Switzerland, Tunisia and the UK capital market have consistently documented a negative relationship between disclosure quality and earnings management.…”

The perceived credibility of forward-looking performance disclosures

“…This framework builds on existing literature on the drivers of voluntary disclosure taking into account the specific nature of forward-looking disclosure (Lang and Lundholm 1993, Healy et al 1999, Mercer 2005, Baber et al 2006, Lapointe-Antunes et al 2006, Butler et al 2007. Given that our FLPDs score, FDSCORE, captures the forward-looking focus of the annual report narratives, we consider factors affecting manager willingness to discuss future performance within these narratives.…”

“…Managers would be more forthcoming about future performance in their published reports when the information demands of the investment community are rising (Lapointe-Antunes et al 2006). Beattie and Smith (2012) find that capital market considerations dominate soft disclosures of UK finance directors.…”

Estimating accruals models in Europe: industry-based approaches versus a data-driven approach

“…Our data show that, if a researcher wishes to investigate the Italian capital market, which is the smallest in our study but one of the largest in the EU, they will estimate AAs for only 43% of the potentially available observations using the 2SICy approach. In response, either an industry classification wider than the two-digit SIC code is used to estimate the accruals models cross-sectionally (e.g., Athanasakou et al, 2009;Gore et al, 2007;Lapointe-Antunes, Cormier, Magnan, & Gay-Angers, 2006;Lehmann, 2016;Sáenz González & García-meca, 2014;Saleh & Ahmed, 2005;Simpson, 2013;Van Tendeloo & Vanstraelen, 2008) or alternative techniques are employed to identify AAs (e.g., Capalbo, Frino, Mollica, & Palumbo, 2014;DeFond & Park, 2001;Francis & Wang, 2008;Ittonen, Johnstone, & Myllymäki, 2015;Jansen, Ramnath, & Yohn, 2012;Zerni, Haapamäki, Järvinen, & Niemi, 2012).…”