An Empirical Investigation of Corporate Voluntary Disclosure of Management\u27s Responsibilities for Financial Reporting

The Sarbanes-Oxley Act of 2002 mandates senior management to certify under oath that information contained in SEC filings is accurate and complete, and attest to the effectiveness of the internal control system. This study examines the factors that influenced senior management to voluntarily issue a statement of responsibilities in annual reports for a five-year period prior to this legislation. Exploring these factors sheds light on three major issues: (1) identifying the environment under which the new legislation would better achieve its objectives; (2) probing into the concerns of firms that must comply with the new legislation; and (3) highlighting implications for the external auditor in planning the audit and assessing audit risk. We hypothesize that confidence in internal control and monitoring mechanisms at larger firms, corporate profitability, business risk and volatility, ownership structure, leverage, and governance monitoring are critical factors in management\u27s decision to report on its responsibilities in financial statements. The results reveal that senior management at larger firms were more likely to voluntarily disclose its responsibilities, ostensibly to maintain credibility with third parties and mitigate sensitivity to political costs. Moreover, management presiding over more-profitable firms were forthcoming with such disclosures, demonstrating a desire to signal its successful stewardship and organizational success. Lastly, senior management of firms in more volatile or uncertain environments displayed an aversion to risk that negatively influenced its disclosure decision. Monitoring by institutional owners, audit committees, and independent auditors displayed little influence on management\u27s disclosure decision

The Relative Importance of Earnings and Book Value in Regulated and Deregulated Markets: The Case of the Airline Industry

This paper examines the valuation effects of earnings and book values on security prices of the airline companies under two different market structures: the regulated and the deregulated periods. In regulated markets, and under the cost recovery plus adequate rate of return on assets, security prices are highly aligned with book values of the respective companies. In the airline industry, regulation took the form of guaranteed routes and of subsidies to service rural areas. In addition, many airlines provide international service which was not subject to US regulations. These features give rise to the differential effect of both book values and earnings. In deregulated times, airline firms operate in highly competitive markets with large airline firms enjoying the benefits of economy of scale and service diversification. Thus, both the asset capitalization (book value) and operational efficiencies (earnings) would be major indicators in the market assessment of the firm\u27s future profitability and security price. The literature lacks empirical evidence in examining the relative importance of earnings and book values in regulated and deregulated markets, especially in an airline industry. This paper aims at extending the literature examining the valuation relevance of earnings and book value in the assessment of security prices in the airline industry. The empirical results of this paper support the predictions of differential impact of earnings and book value in explaining security prices of the airline firms in both economic structures

An Examination of the Determinants and Contents of Corporate Voluntary Disclosure of Management\u27s Responsibilities For Financial Reporting

The Sarbanes-Oxley Act (S-O Act) of 2002 requires principal officers to certify under oath to the veracity of information contained in SEC filings and opine on the effectiveness of the internal control system. This study examines the determinants and contents of corporate voluntary disclosure of management\u27s responsibilities during the five-year period preceding the S-O Act. We predict that the voluntary disclosure of management\u27s responsibilities for financial information signals certain incentives and characteristics of the reporting firm that are relevant to financial statement users and regulators. Consistent with our predictions, our findings reveal significant differences between issuing and non-issuing firms as to the effectiveness of an individual firm\u27s internal control system, access to capital markets, audit committee characteristics, and ownership structure. An empirical analysis of the contents of these assertions also reveals different areas of emphasis and selectivity by management, which represents an informative link to existing disclosure mandates. The results of this study contribute to our knowledge of management\u27s motivations for voluntary disclosure and lend credence to the mandatory certification requirements and related disclosure reforms established in the post-Enron era

Market Revaluations of Foreign Listings’ Reconciliations to U.S. Financial Reporting GAAP

The Securities and Exchange Commission (SEC) requires foreign firms wishing to list their securities on the U.S. exchanges to convert their financial statements to U.S.-based generally accepted accounting principles (GAAP) in a reconciliation filing known as Form 20-F. This paper extends prior research analyzing the importance of the SEC requirement by examining the value relevance to U.S. capital markets of Form 20-F reconciliation information under two additional hypotheses related to: i) investors\u27 anticipation of the reconciliation, and ii) investors\u27 perception of foreign countries\u27 enforcement and reliability in applying local accounting rules. We argue that the information content of the Form 20-F reconciliation data is preempted (at least partially) on the date of foreign earnings announcements because of investor anticipation of these reconciliations. Therefore, only significant unanticipated reconciliations exhibit value relevance on the date of filing. In addition, investor perception of the reliability of the reconciliations and the degree of confidence in foreign authorities enforcing local GAAP also affect the value relevance of the reconciliation data. We hypothesize that reconciliations made by firms from countries with mature and developed capital markets should be more value relevant to U.S. investors. Our results show that both unexpected foreign earnings and anticipated reconciliations to U.S. GAAP are significantly associated with unexpected market returns during the week of earnings announcements. The region of the foreign country is also significantly associated with market returns. However, unexpected reconciliations are not significantly associated with unexpected market returns during the week of Form 20-F filing

The Information Content of Earnings Announcements in Regulated and Deregulated Markets: The Case of the Airline Industry

Most of the accounting research examining the information content of earnings assumes a competitive market framework. Little research has been devoted to the value relevance of earnings announcements in regulated markets. This paper examines the information content of earnings releases under two economic conditions facing the airline industry: regulation and deregulation (i.e., competition). We hypothesize that in a deregulated (competitive) environment, there is greater competition, causing more risk and uncertainty for the investor in setting security prices. Therefore, earnings\u27 releases provide more useful information in resolving uncertainties and in formulating and revising the investor\u27s beliefs regarding future earnings and prices in deregulated than for regulated markets. Three critical event periods are examined: the regulation period (1973 - 1975), the transition period (1976 - 1978), and the deregulation period (1979 - 1981). A revaluation index (RI) and a standardized revaluation index (SRI) are used to examine the extent of airline stock price revaluation in response to quarterly accounting earnings releases during the three critical event periods. The results indicate that earnings announcements have value relevance in setting security prices in both regulated and deregulated market conditions. However, the level of the market revaluation to earnings releases is dependent on market structure. The market revaluation to earnings releases is greater in a deregulated (competitive) period than in a regulated one. This result confirms the hypothesis that earnings have more value relevance in competitive markets than in regulated ones. The findings of this research have direct implications for the level of accounting disclosure and the extent of financial reporting in a given market structure. Since financial reporting is a costly process, it becomes important to identify the circumstances under which the level of financial disclosure should be expanded or reduce