To increase investor awareness of the sensitivity of financial statements to the methods, assumptions, and estimates underlying their preparation, the Securities and Exchange Commission (SEC) proposed that firms include disclosures about critical accounting policies (CAPs) in their 10-Ks. Using a large sample of CAP disclosures from SEC filers, we provide evidence on the extent to which CAP disclosures correlate with existing financial statement information, provide new information, and corroborate theories of voluntary disclosure. We also consider the interaction among disclosures, finding limited support for disclosure decisions following a portfolio rather than an account by account approach.
APB (Accounting Principles Board).1972. “APB Opinion No. 22: Disclosure of Accounting Policies.”New York, NY.
2.
BarthJ.ElliottJ.FinnM.1999. “Market Rewards Associated with Patterns of Increasing Earnings.”Journal of Accounting Research37: 387–413.
3.
BeaverB.1991. “Commentary: Problems and Paradoxes in the Financial Reporting of Future Events.”Accounting Horizons5: 122–134.
4.
BhojrajS.BlacconiereW.D’SouzaJ.2004. “Voluntary Disclosure of a Multi-Audience Selling: An Empirical Investigation.”Accounting Review79 (4): 921–947.
5.
BotosanCPlumleeM.2002. “A Re-Examination of Disclosure Level and the Expected Cost of Equity Capital.”Journal of Accounting Research40: 2140.
6.
CallahanC. M.SmithR. E.2008. “Firm Performance and Management’s Discussion and Analysis Disclosures: An Industry Approach.”Social Science Research Network Working Paper, http://ssrn.com/abstract=588062.
7.
ChoJ-S.ParkJ.WarfieldT.2004. “Disclosure Incentives for Critical Accounting Estimates.”Working paper. University of Wisconsin.
8.
ClarksonP.KaoJ. L.RichardsonG.1994. “The Voluntary Inclusion of Forecasts in the MD&A Section of Annual Reports.”Contemporary Accounting Research (fall): 423–450.
9.
ClarksonP.KaoJ. L.RichardsonG.2000. “The Quality of Management Discussion and Analysis (MD&A): A Voluntary Disclosure Perspective.”Social Science Research Network Working Paper. http://ssrn.com/abstract=2507.
10.
DarroughM.StoughtonN.1990. “Financial Disclosure Policy in an Entry Game.”Journal of Accounting and Economics12(1-3): 219–243.
11.
DechowP.DichevI.2002. “The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors.”The Accounting Review77: 35–59.
12.
FeldmanR.GovindarajS.LivnatJ.SegalB.2008. “The Incremental Information Content of Tone Change in Management Discussion and Analysis.”Social Science Research Network Working Paper, http://ssrn.com/abstracl=l126962.
13.
FieldL.LowryM.ShuS.2005. “Does Disclosure Deter or Trigger Litigation?”Journal of Accounting and Economics39 (1): 487–507.
14.
FrancisJ.PhilbrickD.SchipperK.1994. “Shareholder Litigation and Corporate Disclosures.”Journal of Accounting Research32: 137–164.
15.
FrancisJ.SchipperK.1999. “Have Financial Statements Lost their Relevance?”Journal of Accounting Research37: 319–352.
16.
FrankelR.McNicholsM.WilsonG. P.1995. “Discretionary Disclosure and External Financing.”Accounting Review70 (1): 135–150.
17.
GelbD.ZarowinP.2002. “Corporate Disclosure Policy and the Informativeness of Stock Prices.”Review of Accounting Studies7 (1): 33–52.
18.
HerdmanR. K.2001. “Advancing Investors’ Interests.”Speech by Robert K. Herdman, Chief Accountant, U.S. Securities and Exchange Commission, at the American Institute of Certified Public Accountants’ Twenty-Ninth Annual National Conference on Current SEC Developments. December 6. Washington. DC, http://www.sec.gov/news/speech/spch526.htm.
19.
HerdmanR. K.2002. “Critical Accounting and Critical Disclosures.”Speech at Financial Executives International San Diego Chapter, Annual SEC Update. January 24, San Diego, CA, http://www.sec.gov/news/speech/spch537.htm.
20.
JohnsonM.KasznikR.NelsonK.2001. “The Impact of Securities Litigation Reform on the Disclosure of Forward-Looking Information by High technology Firms.”Journal of Accounting Research39: 297–327.
21.
LiF.2006. “Annual Report Readability. Current Earnings, and Earnings Persistence.”Ross School of Business Paper No. 1028. SSRN e Library, online database. http://ssrn.com/abstract=887382.
22.
LiF.2008. “Do Stock Market Investors Understand the Risk Sentiment of Corporate Annual Reports?”Working paper, University of Michigan.
23.
LundholmR.MyersL.2002. “Bringing the Future Forward: The Effect of Disclosure on the Return-Earnings Relation.”Journal of Accounting Research40: 809–839.
24.
NewmanP.SansingR.1993. “Disclosure Policies with Multiple Users.”Journal of Accounting Research31 (1): 92–112.
25.
PaprockiC.StoneM.2004. “Is the Quality of Critical Accounting Disclosures Lower for Companies with High Information Asymmetry.”Working paper. University of Alabama.
26.
SEC (Securities and Exchange Commission). 2002a. “Disclosure in Management’s Discussion and Analysis about the Application of Critical Accounting Policies.”Release Nos. 33-8098, 34-45907. File No. S7-16-02. http://www.sec.gov/rules/proposed/33-8098.htm.
27.
SEC (Securities and Exchange Commission). 2002b. “Cautionary Advice Regarding Disclosure About Critical Accounting Policies.”Release Nos. 33-8040, 34-45149, FR-60. www.sec.gov/rules/olher/33-8040.htm.
28.
SkinnerD.1994. “Why Do Firms Voluntarily Disclose Bad News?”Journal of Accounting and Economics32: 38–60.
29.
WagenhoferA. 1990. “Voluntary Disclosure with a Strategic Opponent.”Journal of Accounting and Economics12(4): 341–363.
