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Resumo
This study examines whether firms expand accounting disclosures in response to perceived market underevaluation. Using a signaling theory framework, this paper predicts that managers will use discretionary accounting disclosures to align the market's expectations about future earnings performance with their own. More specifically, this study predicts that the market undervalues positive (negative) abnormal earnings firms when the persistence of the abnormal earnings is higher (lower) than market expectations. Therefore, these firms will signal this information to the market by expanding their accounting disclosures. Furthermore, positive and negative abnormal growth firms are expected to seek different types of disclosures to correct the perceived undervaluation. In order to accurately specify the relationships between the earnings characteristics and management's disclosure decisions, it is necessary to evaluate these two categories separately.
The underlying motivation for this study comes from the observation that prior research does not identify the theoretical determinants of management's accounting disclosure decisions. The primary contribution is that this study uses a signaling theory framework to explain why managers expand accounting disclosures and provides empirical tests of the predicted determinants. The findings demonstrated a significant relationship between the persistence of the earnings components with firms' changes in discretionary disclosures. The change in abnormal earnings were not significantly related to the changes in firms' disclosure changes. However, the firms who increased their discretionary diclosures had significantly larger earnings components relative to the firms who decreased their discretionary disclosures. Therefore, this study concludes that management's response in disclosure changes does not occur contemporaneously with changes in the earnings components. This would imply that either (1) management can not make quick changes in its disclosure policy, or (2) management does not change its discretionary disclosures until after it observes the market's undervaluation. These findings do conclude that characteristics of the firms earnings are significantly associated with changes in their disclosure policies. Therefore, any analysis of the benefits to expanded disclosures should also consider the economic characteristics of the reported earnings when isolating the benefits attributed to expanded discretionary accounting disclosures.
