Knowledge that Transforms

This paper considers the role of analyst following in coordinating mutually beneficial disclosure among competing firms. Though firms may benefit from industry-wide transparency, the urge to keep a competitive edge by withholding disclosures can be compelling. In such a case, the desire to attract analyst following can make a policy of joint disclosure viable. Knowing that keeping silent can deter analysts, no firm has incentives to unilaterally withhold disclosures. Further, coordinated disclosures can benefit firms and consumers alike by yielding circumstance-specific product offerings.

We examine whether financial reporting frequency affects the speed with which accounting information is reflected in security prices. For a sample of 28,824 reporting-frequency observations from 1950 to 1973, we find little evidence of differences in timeliness between firms reporting quarterly and those reporting semiannually, even after controlling for self-selection. However, firms that voluntarily increased reporting frequency from semiannual to quarterly experienced increased timeliness, while firms whose increase was mandated by the SEC did not. We conclude that there is little evidence to support the claim that regulation forcing firms to report more frequently improves earnings timeliness.

Compared to non-family firms, family firms face less severe agency problems due to the separation of ownership and management, but more severe agency problems that arise between controlling and non-controlling shareholders. These characteristics of family firms affect their corporate disclosure practices. For S&P 500 firms, we show that family firms report better quality earnings, are more likely to warn for a given magnitude of bad news, but make fewer disclosures about their corporate governance practices. Consistent with family firms making better financial disclosures, we find that family firms have larger analyst following, more informative analysts’ forecasts, and smaller bid-ask spreads.

A firm may prefer not to disclose its private information if it is uncertain of investor response. In the setting under consideration, a firm needs to acquire capital from an investor. The investor can choose to invest in the firm, the risk free asset or in some alternative risky investment opportunity. It is shown that in a partial disclosure equilibrium, the firm discloses average information and withholds bad and good information. Disclosure of average information arises to attract the investor's capital away from the risk free asset.

We investigate going-private decisions in response to the passage of the Sarbanes–Oxley Act of 2002 (SOX). We study firms that go private from 1998 to May 2005 and find: (1) the quarterly frequency of going-private transactions has increased after the passage of SOX, and (2) abnormal returns surrounding both the passage of SOX and the going-private announcement are significantly related to proxies for the costs and benefits of SOX and the net benefits of being a public firm. Our empirical evidence is broadly consistent with the notion that SOX has affected firms’ going-private decisions.

Previous findings that upward earnings management causes a kink in the distribution of annual earnings cannot be verified without a well-specified benchmark for pre-managed annual earnings. We model shifts in the cumulative earnings distribution during the fourth quarter to explain the kink's formation. Logistic regression results show that compared to a control group, a high proportion of firms with small cumulative profits or losses at the beginning of the fourth-quarter report small annual profits rather than small annual losses. This suggests that upward earnings management causes the kink and indicates which firms are likely to manage earnings upward.