The Information Content of Corporate Earnings: Evidence from the Securities Exchange Act of 1934

Abstract

We examine whether the Securities Exchange Act of 1934 increased the information content of corporate earnings disclosures. Prior research questions whether the Act improved disclosure quality but generally relies on longwindow tests and yields mixed results. We focus on whether the Act increased earnings informativeness, improving upon prior designs by focusing on short earnings announcement windows and employing a difference-in-differences design to control for potential contemporaneous structural changes. We document an increase in earnings informativeness following the Act, which is larger for treatment firms (which withheld disclosure before the Act) than * INSEAD Asia Campus;

Did the Securities Exchange Act of 1934 Increase Accounting Comparability?

“…Third, we find evidence that the increase in earnings response coefficients documented in Binz and Graham (2022) is concentrated in firms that experienced larger increases in comparability as a result of the Act. Earnings response coefficients of other firms did not increase.…”

“…The Act empowered the Securities Exchange Commission (SEC) to enforce the Act and the primary disclosure requirement imposed by the SEC following the passage of the Act was the disclosure of sales. Hence, we follow Benston (1973) and Binz and Graham (2022) and classify firms which did not voluntarily disclose sales prior to the Act as treatment firms and all other firms as control firms within a difference-in-differences design. 2 We then use this design to examine, through three sets of tests, whether the Act increased 1 Rajan and Zingales (2003) argue that the Securities Exchange Act of 1934 contributed to last century's unprecedented economic growth by providing "the accounting, regulatory, and legal foundation […] for today's vibrant financial system in the United States."…”

“…However, none of these papers can speak to whether the Act made firms' financial reports more useful to investors. The only exception is Binz and Graham (2022), who show that the Act caused investors to react more to earnings news firms release during their earnings announcements. Binz and Graham (2022) acknowledge that their results could be driven by changes in either accounting practices or enforcement, but they focus on the enforcement channel.…”

“…The only exception is Binz and Graham (2022), who show that the Act caused investors to react more to earnings news firms release during their earnings announcements. Binz and Graham (2022) acknowledge that their results could be driven by changes in either accounting practices or enforcement, but they focus on the enforcement channel. Our findings-specifically that the Act increased comparability and that earnings response coefficients increased only for firms that experienced a larger increase in comparabilityextend Binz and Graham (2022) by showing that the increase in financial reporting informativeness not only derives from changes in enforcement but also from changes in accounting practices.…”

The Decline of Secured Debt

“…Finally, a flurry of legislation during the Depression, including the Securities Act of 1933 and the Securities Exchange Act of 1934, required audits for listing companies and imposed auditor liability for omissions or misstatements in the prospectus and filing statements. These changes may have improved both the quality and the reliability of disclosure (Binz and Graham (2022)). 16 Consistent with the notion that financial reporting improved during the first half of the twentieth century, Hickman (1960) reports the proportion of firms (in four-year intervals) for which data on both earnings and fixed interest charges were available between 1900 and 1943.…”