Do note disclosures influence value relevance more after financial statement placement becomes more uniformly prominent? Evidence from ASU 2011-05

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2022
Authors
Cedergren, Matthew
Chen, Changling
Chen, Kai
Wang, Victor
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We examine whether financial statement note disclosures play an enhanced role in value relevance when the placement of line items among financial statements becomes more uniformly prominent. We consider ASU 2011-05, which prohibited reporting other comprehensive income (OCI) in the statement of changes in stockholders’ equity, and report two main findings. First, using a larger sample and longer time period than early studies examining ASU 2011-05, we document that, relative to firms unaffected by this prohibition, firms required to change OCI placement exhibited positive changes in OCI value relevance after ASU 2011-05 became effective, in line with the FASB’s stated goal of raising OCI prominence. This finding resolves the seemingly puzzling findings of early studies, which documented an unexpected incremental decrease in OCI value relevance for these firms. Second, we find that this effect is enhanced when OCI-related note disclosures are more specific and numeric, and are more readable, more stable, or shorter in length. Collectively, our findings suggest that financial statement placement and note disclosure characteristics interact in a manner such that when financial statement line items influence valuation to a greater extent via prominent placement, qualitative characteristics of accompanying note disclosures assume this role more prominently as well.
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Other comprehensive income, Financial statement placement, Value relevance, Note disclosures, Textual analysis
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