09 Financial Accounting 3: Determinants and consequences of financial reporting attributes (FAR3)

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    Number of Numbers: Does Quantitative Disclosure Reduce Information Risk?
    ( 2021) Campbell, John ; Zheng, Xin ; Zhou, Dexin
    Theoretical research argues that numbers convey more precise information than words. Based on this work, we hypothesize that when managers provide disclosure with a greater proportion of quantitative information, information risk will decrease and firm value will increase. We offer three main findings. First, after controlling for the cash flow news in earnings conference calls, we find a positive association between the extent of hard information (i.e., numerical disclosure) and short-window stock returns around the call. This result suggests that information risk decreases when managers provide greater numerical disclosure. Second, we find that this positive association is larger when firms’ information environment is otherwise poor. Finally, we find that this positive association is larger when uncertainty about firm performance is higher (i.e., when the firm issues a negative earnings surprise). Overall, our results suggest that investors react to the extent of hard information (i.e., numerical disclosure) in earnings conference calls.
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    Does Lower Timely Loss Recognition Reflect Managers' Favorable Private Information?
    ( 2021) Feng, Ivy ; Kimbrough, Michael ; Cao, Yi
    A manager may choose not to record the full extent of bad economic news reflected in negative stock returns (i.e. a manager may exercise low timely loss recognition) if she believes she has private information that justifies a more favorable outlook than the stock market’s pessimistic outlook. Researchers often interpret the resulting deviations between earnings and stock returns as distortions in earnings. However, if managers' more favorable view is correct, earnings will more closely reflect the changes in fundamental value even as they become less aligned with stock returns. In other words, greater deviations between earnings and returns may actually be consistent with more rather than less transparent earnings. We test this possibility using a sample of firm years with negative annual returns. Using future returns as the proxy for the public revelation of managers’ favorable private information, we find that future returns offset current negative returns to a greater extent when managers exercise lower levels of timely loss recognition. Equivalently, we document a negative association between future returns and the portion of implied losses in current negative returns that managers do not recognize. This negative association is stronger when it is more likely that managers have private information. The association is also stronger when managers face higher disclosure costs that prevent full disclosure of their favorable private information. We also find that only a relatively small portion of unrecognized implied losses is recognized in earnings during the subsequent three years. These findings indicate that the traditional explanation for misalignments between earnings and negative stock returns as being due to delayed recognition of economic losses is only partial. Such misalignments are also due to managers’ use of appropriate discretion to include favorable private information in earnings.
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    Economic Consequences of Public Pension Underfunding Transparency: Evidence from Housing Market and Local Economics
    ( 2021) Fan, Haoqing Grace
    This paper sheds light on the mechanisms through which state pension underfunding influences local housing markets and economies. Using both a contiguous border-county approach and a single state study in California, I find that recent pension reporting regulation changes that enhance the transparency and salience of governments’ pension underfunding status led to lower growth in local housing prices. Such effect is stronger in states that are more strongly impacted by the regulation changes, and the media plays an important role in disseminating the information. Other local economic variables, including new building permits, business activities, and public employment outcomes, are also negatively impacted when pension underfunding is revealed.
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    The Role of Related Party Fundraising on the Relation Between Reporting Quality and Donations
    ( 2021) Balsam, Steven ; Harris, Erica ; Wong, Paul
    Prior research shows that donors discount program ratios when a nonprofit organization reports zero fundraising expense. In this paper, we show that a plausible reason for organizations reporting zero fundraising expenses is that a related party conducts fundraising on the organization’s behalf. Consistent with this interpretation, we find that nonprofits reporting a related fundraising entity are more likely to report zero fundraising expenses. We also find that related party fundraising moderates the impact of reporting zero fundraising expenses on donors use of the program ratio in their donation decisions.
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    Trade Credit in Distrust: Evidence from Financial Restatements
    ( 2021) Shou, Ming ; Liu, Qianqiu
    We argue that distrust significantly increases people's perceived information asymmetry and has important economic consequences. By using the occurrence of financial restatement as a proxy for significant trust reduction in financial information, we show that firms rely more on trade credit as an external financing choice after restatements because suppliers have an information advantage and better address information asymmetry problems. After comparing the predictability of sales by trade credit before and after restatements, we find that the informativeness of trade credit about firms' prospects changes during restatement periods. In the pre-restatement periods, firm sales monotonically increase with trade credit. In the post-restatement periods, firms with the most trade credit do not have the best future performance, while firms with the least trade credit experience the lowest subsequent sales. We also find that investors in the stock market do not realize such informativeness change and underreact to the valuable negative information from suppliers.