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Audited financial reporting and voluntary disclosure as complements: A test of the Confirmation Hypothesis

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  • Ball, Ray
  • Jayaraman, Sudarshan
  • Shivakumar, Lakshmanan

Abstract

We examine the “confirmation” hypothesis that audited financial reporting and disclosure of managers' private information are complements, because independent verification of outcomes disciplines and hence enhances disclosure credibility. Committing to higher audit fees (a measure of financial statement verification) is associated with management forecasts that are more frequent, specific, timely, accurate and informative to investors. Because private information disclosure and audited financial reporting are complements, their economic roles cannot be evaluated separately. Our evidence cautions against drawing inferences exclusively from market reactions around “announcement periods” because audited financial reporting indirectly affects information released at other times and through other channels.

Suggested Citation

  • Ball, Ray & Jayaraman, Sudarshan & Shivakumar, Lakshmanan, 2012. "Audited financial reporting and voluntary disclosure as complements: A test of the Confirmation Hypothesis," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 136-166.
  • Handle: RePEc:eee:jaecon:v:53:y:2012:i:1:p:136-166
    DOI: 10.1016/j.jacceco.2011.11.005
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    Cited by:

    1. Kelly, Khim & Tan, Hun-Tong, 2017. "Mandatory management disclosure and mandatory independent audit of internal controls: Evidence of configural information processing by investors," Accounting, Organizations and Society, Elsevier, vol. 56(C), pages 1-20.
    2. De George, Emmanuel T. & Li, Xi & Shivakumar, Lakshmanan, 2016. "A review of the IFRS adoption literature," LSE Research Online Documents on Economics 67599, London School of Economics and Political Science, LSE Library.
    3. Liangliang Jiang & Hui Zhou, 2017. "The role of audit verification in debt contracting: evidence from covenant violations," Review of Accounting Studies, Springer, vol. 22(1), pages 469-501, March.
    4. repec:kap:rqfnac:v:50:y:2018:i:1:d:10.1007_s11156-017-0629-x is not listed on IDEAS
    5. Mike Qinghao Mao & Yangxin Yu, 2015. "Analysts' Cash Flow Forecasts, Audit Effort, and Audit Opinions on Internal Control," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(5-6), pages 635-664, June.
    6. Guay, Wayne & Samuels, Delphine & Taylor, Daniel, 2016. "Guiding through the Fog: Financial statement complexity and voluntary disclosure," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 234-269.
    7. Elmar R. Venter & David Emanuel & Steven F. Cahan, 2014. "The Value Relevance of Mandatory Non-GAAP Earnings," Abacus, Accounting Foundation, University of Sydney, vol. 50(1), pages 1-24, March.
    8. Emmanuel T. De George & Xi Li & Lakshmanan Shivakumar, 2016. "A review of the IFRS adoption literature," Review of Accounting Studies, Springer, vol. 21(3), pages 898-1004, September.
    9. Brandon Gipper & Luzi Hail & Christian Leuz, 2017. "On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data," NBER Working Papers 24018, National Bureau of Economic Research, Inc.
    10. Marinovic, Iván & Sridhar, Sri S., 2015. "Discretionary disclosures using a certifier," Journal of Accounting and Economics, Elsevier, vol. 59(1), pages 25-40.
    11. repec:oup:rfinst:v:29:y:2016:i:12:p:3245-3277. is not listed on IDEAS
    12. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    13. repec:eee:jaecon:v:64:y:2017:i:1:p:123-149 is not listed on IDEAS
    14. repec:spr:reaccs:v:22:y:2017:i:2:d:10.1007_s11142-017-9391-5 is not listed on IDEAS
    15. repec:spr:reaccs:v:22:y:2017:i:4:d:10.1007_s11142-017-9429-8 is not listed on IDEAS
    16. Sarowar Hossain & Gary S. Monroe, 2015. "Chief Financial Officers’ Short- and Long-term Incentive-based Compensation and Earnings Management," Australian Accounting Review, CPA Australia, vol. 25(3), pages 279-291, September.
    17. Ying Cao & Linda A. Myers & Albert Tsang & Yong George Yang, 0. "Management forecasts and the cost of equity capital: international evidence," Review of Accounting Studies, Springer, vol. 0, pages 1-48.
    18. Li, Feng & Minnis, Michael & Nagar, Venky & Rajan, Madhav, 2014. "Knowledge, compensation, and firm value: An empirical analysis of firm communication," Journal of Accounting and Economics, Elsevier, vol. 58(1), pages 96-116.
    19. Koerniadi, Hardjo & Krishnamurti, Chandrasekhar & Lau, Sie Ting & Tourani-Rad, Alireza & Yang, Ting, 2015. "The role of internal and external certification mechanisms in seasoned equity offerings," Journal of Multinational Financial Management, Elsevier, vol. 30(C), pages 110-127.
    20. Florin DOBRE & Adriana Florina POPA & Ada Lorena NICULIÞÃ, 2013. "What Exactly Financial Auditors Report Give the Divergence Between Ethics, Social Responsibility and Financial Performance. Is the Audit Profession Still Sustainable?," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 14(1), pages 63-70, March.
    21. Donovan, John & Frankel, Richard & Lee, Joshua & Martin, Xiumin & Seo, Hojun, 2014. "Issues raised by studying DeFond and Zhang: What should audit researchers do?," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 327-338.
    22. Brandon Gipper & Christian Leuz & Mark Maffett, 2015. "Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime," NBER Working Papers 21530, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Confirmatory role of financial reporting; Private information; Credible commitment; Voluntary disclosure; Management forecasts; Audit verification;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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