The Monitoring Effect of More Frequent Disclosure

Abstract

This paper examines the monitoring effect of disclosure frequency from a shareholder perspective. For our analyses, we use a setting in the European Union in which reporting frequency requirements differed across and within countries before being harmonized by a directive requiring the implementation of quarterly disclosure. We investigate how both cross‐sectional differences in reporting frequency and their harmonization affect shareholders' ability to monitor managers. To gauge monitoring effects, we use shareholders' valuation of cash assets. We find that semi‐annual reporters exhibit lower cash valuation than quarterly reporters. Using a difference‐in‐differences approach, we show that these differences recede after semi‐annual reporters implement a higher reporting frequency. Our results are consistent with the notion that more frequent disclosure reduces expected agency costs by providing shareholders with the opportunity for timelier monitoring to constrain managers from expropriating corporate resources. In additional analyses, we find that this monitoring effect is robust to using alternative measures of the change in cash and agency costs as well as alternative benchmark groups. Further, we find stronger effects when corporate governance or earnings quality is low.

Does Disclosure of Advertising Spending Help Investors and Analysts?

“…Consistent with this argument, Dhaliwal et al (2011) find that disclosures of material weakness in a firm's operations are more valuable for firms for which banks and credit agencies face higher monitoring costs. In addition, Downar, Ernstberger, and Link (2018) find that the benefits of higher disclosure frequency are greater for firms that typically require more monitoring. Therefore, we propose that the value of disclosure of advertising spending for analysts is greater for firms with higher monitoring costs.…”

Interim financial reporting disclosure by listed firms in the Asia-Pacific region and influencing factors

“…IR disclosure provides valuable information, reduces information asymmetry (McNichols and Manegold, 1983; Craig and Diga, 1998; Landsman and Maydew, 2002; Griffin, 2003; Yee, 2004; Cuijpers and Peek, 2010; Kubota et al , 2010), reduces cost of capital (Fu et al , 2012; Stoumbos, 2019) and agency cost (Downar et al , 2018), improves market liquidity (Yee, 2004; Mensah and Werner, 2008; Cuijpers and Peek, 2010; Arif and De George, 2020) and managers’ monitoring (Joshi and Bremser, 2003; Mangena et al , 2007; Balakrishnan and Ertan, 2017), affects share prices and trading actions (Opong, 1995; Schadewitz et al , 2002; Alves and Dos Santos, 2008).…”

Financial Reporting Frequency and Corporate Innovation

“…Research on the frequency of financial reporting largely focuses on its effects on firms' information environments, such as the information content of annual reports (McNichols and Manegold 1983), earnings timeliness (Alford et al 1993;Butler, Kraft, and Weiss 2007), and the cost of equity (Fu, Kraft, and Zhang 2012;Verdi 2012). Recent studies begin to examine the effects of frequent financial reporting on managerial decisions, such as investments in fixed assets (Nallareddy, Pozen and Rajgopal 2017;Kraft, Vashishtha and Venkatachalam 2018;Kajüter, Klassmann, and Nienhaus 2019), real activities manipulations (Ernstberger et al 2017), cash holdings (Downar, Ernstberger and Link 2018), and banks' loan portfolio quality (Balakrishnan and Ertan 2018). Given the mixed evidence in the literature, Roychowdhury, Shroff, and Verdi (2019) conclude that whether an increase in reporting frequency decreases managers' investment horizon and induces myopia, or whether it increases transparency and serves a disciplinary role remains an open question.…”