The Value Relevance of Financial Statement Recognition vs. Disclosure: Evidence from SFAS No. 106

Davis‐Friday, Paquita Y.; Folami, Lookman Buky; Liu, Chao‐Shin; Mittelstaedt, Horst

doi:10.2308/accr.1999.74.4.403

Cited by 190 publications

(99 citation statements)

References 9 publications

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“…First, the recognition versus disclosure literature provides mixed evidence on whether the capital market reacts equally to items that are only disclosed in financial statement footnotes versus those that are incorporated into the financial statements (Aboody, 1996;Davis-Friday et al, 1999). Second, Ang and Peterson (1984) find that a greater use of debt is associated with a greater use of leases.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

Operating Leases and Credit Assessments

Altamuro

Johnston²,

Pandit

et al. 2012

SSRN Journal

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Operating leases have grown significantly as a source of corporate financing over the last 30 years. Their offbalance sheet treatment, which may in part explain their popularity, raises concern that financial risk may be misjudged and capital misallocated. Prior research evidence on the above issue is mixed. To improve reporting transparency, regulators propose a new accounting concept, right of use, which will add the present value of most leases to the balance sheet. We examine the effect of operating leases on loan pricing by banks, a sophisticated financial statement user. Since leases are a potential debt substitute, we expect them to be important in our setting. With loan spreads as the dependent variable, we test the differential explanatory power and model fit of as-reported financial ratios versus financial ratios adjusted for the capitalization of operating leases. We find that lease-adjusted financial ratios better explain loan spreads, especially for larger lenders. Our results also suggest that retailer leases that are closer in substance to rental agreements than financed asset purchases are less relevant for credit risk assessments. Thus we conclude that banks not only price operating leases, on average, but also make distinctions about which leases should be priced. Second, we explore the role of credit rating agencies and confirm that credit ratings also reflect capitalized operating leases, and find support for an informational role for others' credit assessments. However, unlike banks, rating agencies appear to capitalize all operating leases mechanically. Overall, our results suggest that banks and rating agencies adjust for the off-balance sheet presentation of operating leases and, at least in the case of banks, attempt to do so to reflect the underlying economics of the leases. This evidence lessens concern over the potential negative consequences of existing operating lease accounting and raises concern over proposed accounting that capitalizes all leases regardless of their economic characteristics. Electronic copy available at: http://ssrn.com/abstract=1115924 1 AbstractOperating leases have grown significantly as a source of corporate financing over the last 30 years. Their off-balance sheet treatment, which may in part explain their popularity, raises concern that financial risk may be misjudged and capital misallocated. Prior research evidence on the above issue is mixed. To improve reporting transparency, regulators propose a new accounting concept, right of use, which will add the present value of most leases to the balance sheet. We examine the effect of operating leases on loan pricing by banks, a sophisticated financial statement user. Since leases are a potential debt substitute, we expect them to be important in our setting. With loan spreads as the dependent variable, we test the differential explanatory power and model fit of as-reported financial ratios versus financial ratios adjusted for the capitalization of operating leases. We find that lease-adjusted financial...

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Section: Hypotheses Developmentmentioning

confidence: 99%

Operating Leases and Credit Assessments

Altamuro

Johnston²,

Pandit

et al. 2012

SSRN Journal

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“…12. Davis-Friday et al (1999) indicate that investors attribute more weight to retiree and other pension liabilities that are explicitly recognized in the body of the financial statements compared to related information that just disclose those liabilities. 13.…”

Section: Conclusion and Policy Recommendationsmentioning

confidence: 99%

A Conceptual Framework for Corporate Risk Disclosure Emerging From the Agenda for Corporate Governance Reform

Solomon

Norton

et al. 2000

The British Accounting Review

227

213

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“…Papers addressing voluntary disclosure include those from Alfaraih andAlanezi (2011), Al-akra andAli (2012), and Uyar and Kılıc (2012). Studies regarding mandatory disclosure include those from Davis-Friday, Folami, Liu, and Mittelstaedt (1999), Hassan and Mohd-Saleh (2010), Bokpin (2013), and Tsalavoutas and Dionysiou (2014). Th e study from Hassan et al (2009) covers both mandatory and voluntary disclosure.…”

Section: Introductionmentioning

confidence: 99%

Value Relevance vis-à-vis Disclosure on Business Combinations and Goodwill Recognized by Publicly Traded Brazilian Companies

Souza

Borba

2016

Rev. contab. finanç.

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The objective of this study is to examine the value relevance of the level of disclosure on business combinations and goodwill recognized by publicly traded Brazilian companies. The research sample is composed of publicly traded Brazilian companies that carried out any type of business combination, as the acquiring entity, between 2010 and 2013, yielding a total sample of 202 observations. To measure the disclosure level of each, a metric was created based on CPC-15 R1 (2011) to examine certain disclosure items in order to render a greater level of detail. Data collection was carried out using the footnotes to the annual consolidated standardized financial statements (DFPs) available from the São Paulo Stock Exchange (BM&FBOVESPA) website. The results revealed that disclosure levels for business combinations are positively and significantly associated with the stock price of the companies analyzed. As to the recognition of goodwill during business combinations, despite the fact that it represents a significant share of the value of the transactions, no statistical significance explaining stock price behavior was found. It also bears mentioning that the average level of disclosure identified in the explanatory notes in the sample was very low, indicating that companies need to improve when it comes to transparency of information.

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The Value Relevance of Financial Statement Recognition vs. Disclosure: Evidence from SFAS No. 106

Cited by 190 publications

References 9 publications

Operating Leases and Credit Assessments

Operating Leases and Credit Assessments

A Conceptual Framework for Corporate Risk Disclosure Emerging From the Agenda for Corporate Governance Reform

Value Relevance vis-à-vis Disclosure on Business Combinations and Goodwill Recognized by Publicly Traded Brazilian Companies

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