Ebook The Impact of Earnings Performance on Price Sensitive Disclosures under the Australian Continuous Disclosure Regime
The relation between firm performance and discretionary disclosure is a basic but important question to financial market participants and regulators, but there is still only limited understanding of the association between earnings performance and discretionary disclosure (Miller, 2002). Research has shown that this relation is complex and dependent on many factors. Various theoretical models of discretionary disclosure produce different predictions of disclosure outcomes, and empirical research often finds conflicting evidence. Skinner (1995) suggests two reasons for the conflicting findings: the focus on management earnings forecasts as a measure of discretionary disclosure, and changing legal environment. This study addresses both factors by examining the association between earnings performance and a broader measure of disclosure: the price sensitive disclosures issued by publicly listed firms to the Australian Stock Exchange (ASX), under the Australian continuous disclosure regime (henceforth the CDR).
One of the most important factors affecting corporate disclosure is a country's legal environment. The litigation cost hypothesis is often used to explain the link between bad news and voluntary disclosure (Skinner, 1994). The Australian disclosure environment, with its unique combination of half-yearly reporting, low private litigation threats, and stringent statutory backed continuous disclosure requirements that are primarily enforced through a central stock exchange (ASX) and a regulatory body (the Australian Securities and Investments Commission), provides an unique opportunity for the study of corporate disclosure. Given the strong public concerns about corporate governance and the latest legal reforms in Australia and the United States after the latest spate of corporate failures, evidence from the Australian environment may help both Australian and overseas regulators and market participants evaluate the effectiveness of the Australian disclosure regime, the need for further legal reform, and/or the type of reforms required. For example, there has been continuing interest by the government and the public in the effectiveness of the CDR, and recent CLERP9 reforms introduced on-the-spot fines for breaches of the CDR to strengthen ASIC's enforcement powers. However, there has only been limited research on the disclosure practices under the CDR.
One issue of particular interest to regulators and investors is the question of asymmetric treatment by corporate managers of good news and bad news. The suspicion of asymmetric disclosure practices is a major concern to regulators. For example, Lang and Lundholm (1993) state that "underlying many of the SEC s deliberations and the discussion in exchange listing guides, for example, is a concern that management will tend to be more forthcoming when the firm is performing well than when it is performing poorly." In Australia, the continuous disclosure rules require the disclosure of all material information regardless of the nature of the news (good or bad news). However, the impact of the disclosure rules may not be the same for good news and bad news firms. ASIC Deputy Chair Julian Segal said in her address to the Australian Institute of Company Directors on 31 October 2001 that one example of the reasons for companies' non-compliance with the continuous disclosure rules is to delay the release of bad news until there are some good news to 'balance' the bad news with.
Nevertheless, at variance with the concern about inadequate disclosure by poorly performing firms, anecdotal evidence and recent research suggest that firms with bad news are more likely to give warning before the actual earnings announcement than firms with good news (e.g., Skinner, 1994; Soffer, 2001). There is also conflicting research evidence on this issue over time. This study contributes to both the Australian research on the CDR and to the more general research on discretionary disclosure by analysing the inherently different costs and benefits of disclosure for good news and bad news in the specific context of the continuous disclosure environment, and providing evidence on the relation between earnings performance and price sensitive disclosures under this environment.
Despite the lack of private shareholder litigation threats, this study argues that natural capital market forces and regulatory attention are sufficient to create asymmetric costs for inadequate disclosure so that firms with bad news earnings are more likely to make continuous disclosure than firms with good news earnings. On average, multivariate regression results support this hypothesis for sample firms. However, firms facing an earnings loss appear to face strong incentives not to disclose bad news, and these firms are found to have a higher level of price sensitive disclosure when they have good news compared to when they have bad news.
Posted in :
