This paper examines how historical financial reporting can serve as an ex post check on more timely voluntary disclosures, and shows that such a check can be sufficient to ensure that the voluntary disclosures are credible most of the time. The model describes an adverse selection setting where an informed seller communicates with an uninformed buyer over time, but there is no exogenous means of making the seller's communication credible. The addition of an ex post report enables the buyer to assess the accuracy of the seller's prior communications and gives the buyer a means to punish a seller who has disclosed falsely in the past. Under certain conditions, this threat of punishment keeps the seller honest in the present most of the time. The model provides a formal means of evaluating the Lundholm (1999) proposal that accounting regulation should turn its attention to supporting credible voluntary disclosures by reporting on the accuracy of past estimates.
Get full access to this article
View all access options for this article.
References
1.
AICPA Special Committee on Financial Reporting.1994. “Improved Business Reporting—A Customer Focus.”American Institute of Certified Public Accountants.
2.
BalogS.1991. “What An Analyst Wants from You.”Financial Executive (July-August): 47–52.
3.
BotosanC.HarrisM.. 1998. “The Cross-Sectional Determinants of Disclosure Timeliness: An Examination of Quarterly Segment Disclosures.” Working paper, Washington University.
4.
DarroughM. N.StoughtonN. M.. 1990. “Financial Disclosure Policy in an Entry Game.”Journal of Accounting and Economics12:219–243.
5.
DechowP.SloanR.SweeneyA.. 1996. “Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC.”Contemporary Accounting Research13 (Spring): 1–36.
6.
DeGrootM.1975. Probability and Statistics. Reading, Mass.: Addison-Wesley.
7.
DyeR.1985. “Disclosure of Nonproprietary Information.”Journal of Accounting Research23 (Spring): 123–145.
8.
ElliotR.JacobsonP.. 1991. “U.S. Accounting: A National Emergency.”Journal of Accountancy (November): 54–58.
9.
ForsytheR.LundholmR.ReitzT.. 1999. “Adverse Selection and Voluntary Disclosure in Financial Markets: Some Experimental Evidence.”Review of Financial Studies (Fall): 481–518.
10.
FudenbergD.TiroleJ.. 1991. Game Theory.Cambridge, Mass.: MIT Press.
11.
GiglerF.1994. “Self-Enforcing Voluntary Disclosures.”Journal of Accounting Research (Autumn): 224–240.
12.
GiglerF.HemmerT.. 1998. “On the Frequency, Quality and Informational Role of Mandatory Financial Reports.”Journal of Accounting Research36 (Supplement): 117–148.
13.
GrossmanS. J.1981. “The Informational Role of Warranties and Private Disclosure about Product Quality.”Journal of Law and Economics461–483.
14.
HarrisM. S.1998. “The Association between Competition and Managers' Business Segment Reporting Decisions.”Journal of Accounting Research36 (Spring): 111–128.
15.
HayesR. M.LundholmR. J.. 1996. “Segment Reporting to the Capital Market in the Presence of a Competitor.”Journal of Accounting Research34 (Autumn): 261–279.
16.
IjiriY.1975. Theory of Accounting Measurement.American Accounting Association.
17.
JenkinsE.1994. “An Information Highway in Need of Capital Improvements.”Journal of Accountancy178 (May): 77–80, 82.
18.
JungW.KwonY.. 1988. “Disclosures When the Market Is Unsure of Information Endowment of Managers.”Journal of Accounting Research26 (Spring): 146–153.
19.
KimJ.1996. “Cheap Talk and Reputation in Repeated Pretrial Negotiation.”RAND Journal of Economics27 (Winter): 787–802.
20.
KingR.1988. “The Liar's Discount.”Forbes (May 30): 80–82.
21.
KrepsD.1990. A Course in Microeconomic Theory. Princeton, N.J.: Princeton University Press.
22.
LevB.1997. “The Old Rules No Longer Apply.”Forbes (April 7): 34–36.
23.
LundholmR.1999. “Reporting on the Past: A New Approach to Improving Accounting Today.”Accounting Horizons13 (December): 315–323.
24.
MatthewsS.PostlewaiteA.. 1985. “Quality Testing and Disclosure.”Rand Journal of Economics16 (Autumn): 328–340.
25.
MilgromP. R.1981. “Good News and Bad News: Representation Theorems and Application.”Bell Journal of Economics12 (Autumn): 380–391.
26.
MyersS.MajlufN.. 1984. “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have.”Journal of Financial Economics13:187–221.
27.
NewmanP.SansingR.. 1993. “Disclosure Policies with Multiple Users.”Journal of Accounting Research31 (Spring): 92–112.
28.
PennoM. C.1997. “Information Quality and Voluntary Disclosure.”Accounting Review72 (April): 275–284.
29.
PetroniK.1992. “Optimistic Reporting in the Property-Casualty Insurance Industry.”Journal of Accounting and Economics15:485–508.
30.
RimermanT.1990. “The Changing Significance of Financial Statements.”Journal of Accountancy79 (April): 82–83.
31.
RoopJ.1996. “Investor Relations for Turnarounds: Ten Tips to Restore Your Company's Good Name.”Public Relations Quarterly40 (Winter): 15–17.
32.
SansingR.1992. “Accounting and the Credibility of Management Forecasts.”Contemporary Accounting Research9 (Fall): 33–45.
33.
StockenP.2000. “The Credibility of Voluntary Disclosure.”The RAND Journal of Economics31 (Summer): 359–375.
34.
VerrecchiaR. E.1983. “Discretional Disclosure.”Journal of Accounting and Economics5 (December): 179–194.
35.
WagenhoferA.1990. “Voluntary Disclosure with a Strategic Opponent.”Journal of Accounting and Economics12:341–363.
36.
WallmanS.1995. “The Future of Accounting and Disclosure in an Evolving World: The Need for Dramatic Change.”Accounting Horizons9 (September): 81–91.
37.
WallmanS.. 1997. “SEC Loves IC, An Interview with Steve Wallman.”Forbes (April 7): 38–39.
38.
WilliamsP.1996. “The Relation between a Prior Earnings Forecast by Management and Analyst Response to a Current Management Forecast.”Accounting Review71 (January): 103–116.
