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Market Effects of Recognition and Disclosure

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  • Mary E. Barth
  • Greg Clinch
  • Toshi Shibano
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    Abstract

    Our recognition and disclosure model reveals that price informativeness is determined by the interaction of the qualities of three information sources-the recognized amount, the disclosed information, and the information revealed by price-and accounting expertise acquisition. It also reveals that recognition of an accounting amount alters each of these, thereby affecting price informativeness. Perhaps surprisingly, we find that recognition of a highly unreliable accounting amount, rather than simply disclosing it, can result in greater price informativeness. Likewise, recognition of a highly reliable amount can result in lower price informativeness. Our findings suggest that, because of the effects of aggregation, basing recognition decisions on reliability alone is too simplistic. Reliability relative to relevance is key, not reliability per se. We also find that recognition and disclosure affect the coefficients in a regression of price on accounting amounts. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2003.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Accounting Research.

    Volume (Year): 41 (2003)
    Issue (Month): 4 (09)
    Pages: 581-609

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    Handle: RePEc:bla:joares:v:41:y:2003:i:4:p:581-609

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    Cited by:
    1. Andrea Melis & Silvia Carta, 2010. "Does accounting regulation enhance corporate governance? Evidence from the disclosure of share-based remuneration," Journal of Management and Governance, Springer, vol. 14(4), pages 435-446, November.
    2. Stephen Morris & Hyun Song Shin, 2006. "Optimal Communication," Levine's Bibliography 321307000000000236, UCLA Department of Economics.
    3. Hann, Rebecca N. & Heflin, Frank & Subramanayam, K.R., 2007. "Fair-value pension accounting," Journal of Accounting and Economics, Elsevier, vol. 44(3), pages 328-358, December.
    4. Shilpa Manaktala & John D. Phillips & Karen Teitel, 2004. "The Earnings Quality Consequences of Announcements to Voluntarily Adopt the Fair Value Method of Accounting for Stock-Based Compensation," Working Papers 0413, College of the Holy Cross, Department of Economics.
    5. Adela Deaconu & Anuţa Buiga & Cristina Nistor, 2010. "The Value Relevance of Fair Value," Transition Studies Review, Springer, vol. 17(1), pages 151-169, May.
    6. Roy Clemons, 2010. "Do external sources generate greater investor awareness that can affect a firm's value and cost of capital?," Review of Accounting and Finance, Emerald Group Publishing, vol. 9(4), pages 382 - 394, November.
    7. Choudhary, Preeti, 2011. "Evidence on differences between recognition and disclosure: A comparison of inputs to estimate fair values of employee stock options," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 77-94, February.
    8. Borio, Claudio & Tsatsaronis, Kostas, 2004. "Accounting and prudential regulation: from uncomfortable bedfellows to perfect partners?," Journal of Financial Stability, Elsevier, vol. 1(1), pages 111-135, September.
    9. Stephen Morris & Hyun Song Shin, 2012. "Contagious Adverse Selection," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 1-21, January.
    10. Negina Kencono Putri & Triani Arofah, 2013. "The Impact of Risk Report Formats on Investment Analyst Decisions: An Experimental Case from Indonesia," Asian Academy of Management Journal of Accounting and Finance, Penerbit Universiti Sains Malaysia, vol. 9(1), pages 89-112.
    11. Jannis Bischof & Ulf Brüggemann & Holger Daske, 2012. "Fair Value Reclassifications of Financial Assets during the Financial Crisis," SFB 649 Discussion Papers SFB649DP2012-010, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    12. Butzbach, Olivier & Di Carlo, Ferdinando, 2008. "The effects of stock options accounting regulation on corporate governance: A comparative European study," MPRA Paper 14843, University Library of Munich, Germany.
    13. Haifeng You & Xiao-Jun Zhang, 2011. "Limited attention and stock price drift following earnings announcements and 10-K filings," China Finance Review International, Emerald Group Publishing, vol. 1(4), pages 358-387, August.
    14. Ching-Chieh Lin & Chi-Yun Hua & Shu-Hua Lee & Wen-Chih Lee, 2011. "The policy consequence of expensing stock-based compensation," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 19(1), pages 80-93, March.

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