Posts Tagged ‘Holly Yang’

Mandatory Financial Reporting Environment and Voluntary Disclosure

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday January 11, 2013 at 9:12 am
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Editor’s Note: The following post comes to us from Karthik Balakrishnan and Holly Yang, both of the Department of Accounting at the University of Pennsylvania Wharton School, and Xi Li of the Fox School of Business at Temple University.

In the paper, Mandatory Financial Reporting Environment and Voluntary Disclosure: Evidence from Mandatory IFRS Adoption, which was recently made publicly available on SSRN, we investigate the interaction between mandatory financial reporting environment and voluntary disclosure by employing the mandatory adoption of International Financial Reporting Standards (IFRS) in 2005 as an exogenous increase to mandatory reporting to examine changes in firms’ voluntary disclosure practices. To measure voluntary disclosure, we focus on a discretionary action, namely the extent to which managers provide earnings forecasts, the most prominent performance measure that a firm supplies to investors. Ex-ante, it is unclear how the increase in reporting quality following the mandatory adoption of IFRS could influence management forecasts. On the one hand, mandatory financial reporting and voluntary disclosure can be complements, wherein the former produces verifiable information that improves the credibility of the latter and therefore encourages managers to issue more forecasts, i.e. the confirmatory role of mandatory reporting.

Prior studies document improved reporting quality following IFRS adoption, evidenced by earnings with lower manipulation and higher value relevance, timeliness, and information content. Therefore, given the evidence that IFRS improves the verifiability of earnings, the complementary view suggests that the mandatory adoption of IFRS should increase management forecasts. On the other hand, mandatory financial reporting and voluntary disclosure could also be substitutes, as private information that was previously conveyed through voluntary disclosure is now directly reflected in mandatory financial reports. Since IFRS produces more timely and value-relevant earnings numbers, the substitution effect predicts that the increased quality of financial reporting may reduce the demand for supplementary information from investors to predict future earnings. Therefore, IFRS adoption may also lead to fewer management forecasts.

…continue reading: Mandatory Financial Reporting Environment and Voluntary Disclosure

Capital Market Consequences of Managers’ Voluntary Disclosure Styles

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday September 21, 2011 at 9:21 am
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Editor’s Note: The following post comes to us from Holly Yang of the Department of Accounting at the University of Pennsylvania.

In the paper, Capital Market Consequences of Managers’ Voluntary Disclosure Styles, which is forthcoming in the Journal of Accounting and Economics, I examine the capital market consequences of managers establishing an individual disclosure style. While both neoclassical economic and agency theories suggest that managers’ individual preferences should not have an effect on corporate outcomes, several recent academic studies find that managers have styles of their own that they carry from one firm to the other. Anecdotal evidence also suggests that manager credibility matters to financial analysts, who penalize CEOs and CFOs that fail to effectively manage expectations. To the extent that these manager-specific “styles” affect investors’ perceptions of the manager’s overall reputation and credibility, investors should take this into consideration when responding to managers’ disclosure decisions.

…continue reading: Capital Market Consequences of Managers’ Voluntary Disclosure Styles

The Role of Earnings Guidance in Resolving Sentiment-driven Overvaluation

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday June 10, 2011 at 9:28 am
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Editor’s Note: The following post comes to us from Nicholas Seybert of the Department of Accounting & Information Assurance University of Maryland, and Holly Yang of the Accounting Department at the University of Pennsylvania.

In our paper, The Party’s Over: The Role of Earnings Guidance in Resolving Sentiment-driven Overvaluation, which was recently made publicly available on SSRN, we show that an important link between investor sentiment and firm overvaluation is optimistic earnings expectations, and that management earnings guidance aids in resolving sentiment-driven overvaluation. Understanding the underlying process linking investor sentiment to overvaluation provides insight into investor psychology and difficult-to-predict bull and bear markets. Currently, there are multiple possible explanations for why uncertain stocks are overvalued during high sentiment periods. For example, investors may exhibit different preferences, such as reduced risk aversion, during high sentiment periods, which would lead them to overpay for stocks with high valuation uncertainty. Under this scenario, in subsequent months, a general shift in investing trends or psychology would lead to the gradual decline in prices. Alternatively, investors may engage in a more detailed thought process that involves unrealistic expectations of future firm earnings, where there is more potential to overestimate future earnings for uncertain firms. Under this scenario, in subsequent months, revisions in earnings guidance or other earnings news released by the overvalued firms should lead to predictable price declines. We focus on the second explanation, examining management earnings guidance to test the extent to which the correction of earnings expectations mitigates the overvaluation problem.

…continue reading: The Role of Earnings Guidance in Resolving Sentiment-driven Overvaluation

 
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