The Effect of Regulation on Statement Disclosures in the 1915 Moody's Manuals

Abstract

United States firms in the early 20th century were subject to public and private regulation. Forms of regulation included rate regulation and stock exchange listing requirements. These regulations created incentives to report income statement information. This study utilizes the 1915 Moody's Analyses of Investments to test whether regulated firms in the United States reported more income statement information than unregulated firms. Rate regulation influenced utilities to report income statements more frequently than industrial companies. Stock market listing requirements also influenced the reporting of income statements. Therefore, the results indicate that both public and private regulations influenced financial reporting in the early 20th century. Another finding of the study is that income statements were more frequently reported than balance sheets for both railroads and utilities.

Rumors and Runs in Opaque Markets: Evidence from the Panic of 1907

“…Such reporting then became mandatory in 1899. Still, the adherence to and enforcement of the rule remained weak for many years, and the content of these reports varied significantly in their extent and accuracy (Archambault and Archambault (2005) and Sivakumar and Waymire (1993)). In particular, companies in sectors subject to rate regulation saw the greatest incentive to publish their accounts, but their regulation also created incentives to manipulate their earnings statements (Archambault and Archambault (2011)).…”

Financial Reporting in 1920: The Case of Industrial Companies

“…Thus, disclosure is a function of various influences. Archambault and Archambault [2005] also document a positive relationship between listing status and a voluntary disclosure of statements. The disclosure of statements was generally required by the exchanges by 1920.…”

“…The literature also supports the relationship between increased disclosure and listing status. Archambault and Archambault [2005] report that pre-regulation firms listed on stock exchanges were more likely to disclose an income statement and a balance sheet. Singhvi and Desai [1971] found increased disclosure for firms trading on public exchanges relative to those traded overthe-counter.…”

“…The study concludes that the quality of financial disclosure increases with economic incentives to provide information to investors. Archambault and Archambault [2005] find that regulated utilities typically reported income statements in the 1915 Moody's Analyses of Investments (Moody's). They also report that industrial companies that are listed on a stock exchange were more likely to issue both income statements and balance sheets than were unlisted companies.…”

“…That study focused on the regulatory component of Coombs and Edwards' [1995] disclosure model. The current study uses a similar approach and data set as Archambault and Archambault [2005], but examines a different issue. The focus of the current paper is on the motivations for companies to disclose information voluntarily.…”