Regulators and the general public frequently advocate for higher-quality disclosure policies to reduce information asymmetry. Research and anecdotal evidence documents sizable benefits to firms that maintain high quality disclosure. This thesis explores the costs and benefits of changing disclosure quality from the perspective of the financial analysts, a sophisticated user group. This thesis presents a comprehensive view of analysts’ evaluations of disclosure quality. I investigate capital market reaction when firms experience a sustained decrease in analyst disclosure ratings. The results demonstrate that firms with deteriorating disclosure experience negative consequences, consistent with increasing information asymmetry. However, the magnitude is not as large as expected given the benefits enjoyed when disclosure quality improves. Given that firms that allow their disclosure quality to decline give up benefits they previously enjoy, I investigate why they allow this decline to occur. The deterioration is negatively associated with the interaction between capital demand and expected earnings performance implying that when firms require capital, but are expecting poor future earnings, they are more likely to permit a deterioration to occur. Declines are also associated with the occurrence of various disruptive events that imply greater uncertainty about the firm. These firms have a strong demand for external capital which they satisfy by accessing private and public debt markets. Overall, firms that experience disclosure ratings declines are not a mirror image of firms that experience ratings increases. Finally, I investigate the association between the disclosure ratings and quantitative disclosure characteristics. The results indicate significant associations, consistent with the assumption that easily accessible and quantifiable disclosure measures are captured in analysts’ ratings of disclosure quality. This thesis adds to the literature by providing insight into how analysts evaluate disclosure quality and what managers are willing and able to deliver. The research documents attributes of disclosure quality that are regarded as important by financial analysts. While analysts are a key set of financial statement users, there are many other types of users. By understanding disclosure quality from a user's perspective, regulators and researchers are more able to anticipate the implications of a proposed change in disclosure rules.

Regulators and the general public frequently advocate for higher-quality disclosure policies to reduce information asymmetry. Research and anecdotal evidence documents sizable benefits to firms that maintain high quality disclosure. This thesis explores the costs and benefits of changing disclosure quality from the perspective of the financial analysts, a sophisticated user group. This thesis presents a comprehensive view of analysts’ evaluations of disclosure quality. I investigate capital market reaction when firms experience a sustained decrease in analyst disclosure ratings. The results demonstrate that firms with deteriorating disclosure experience negative consequences, consistent with increasing information asymmetry. However, the magnitude is not as large as expected given the benefits enjoyed when disclosure quality improves. Given that firms that allow their disclosure quality to decline give up benefits they previously enjoy, I investigate why they allow this decline to occur. The deterioration is negatively associated with the interaction between capital demand and expected earnings performance implying that when firms require capital, but are expecting poor future earnings, they are more likely to permit a deterioration to occur. Declines are also associated with the occurrence of various disruptive events that imply greater uncertainty about the firm. These firms have a strong demand for external capital which they satisfy by accessing private and public debt markets. Overall, firms that experience disclosure ratings declines are not a mirror image of firms that experience ratings increases. Finally, I investigate the association between the disclosure ratings and quantitative disclosure characteristics. The results indicate significant associations, consistent with the assumption that easily accessible and quantifiable disclosure measures are captured in analysts’ ratings of disclosure quality. This thesis adds to the literature by providing insight into how analysts evaluate disclosure quality and what managers are willing and able to deliver. The research documents attributes of disclosure quality that are regarded as important by financial analysts. While analysts are a key set of financial statement users, there are many other types of users. By understanding disclosure quality from a user's perspective, regulators and researchers are more able to anticipate the implications of a proposed change in disclosure rules.

Regulators and the general public frequently advocate for higher-quality disclosure policies to reduce information asymmetry. Research and anecdotal evidence documents sizable benefits to firms that maintain high quality disclosure. This thesis explores the costs and benefits of changing disclosure quality from the perspective of the financial analysts, a sophisticated user group. This thesis presents a comprehensive view of analysts’ evaluations of disclosure quality. I investigate capital market reaction when firms experience a sustained decrease in analyst disclosure ratings. The results demonstrate that firms with deteriorating disclosure experience negative consequences, consistent with increasing information asymmetry. However, the magnitude is not as large as expected given the benefits enjoyed when disclosure quality improves. Given that firms that allow their disclosure quality to decline give up benefits they previously enjoy, I investigate why they allow this decline to occur. The deterioration is negatively associated with the interaction between capital demand and expected earnings performance implying that when firms require capital, but are expecting poor future earnings, they are more likely to permit a deterioration to occur. Declines are also associated with the occurrence of various disruptive events that imply greater uncertainty about the firm. These firms have a strong demand for external capital which they satisfy by accessing private and public debt markets. Overall, firms that experience disclosure ratings declines are not a mirror image of firms that experience ratings increases. Finally, I investigate the association between the disclosure ratings and quantitative disclosure characteristics. The results indicate significant associations, consistent with the assumption that easily accessible and quantifiable disclosure measures are captured in analysts’ ratings of disclosure quality. This thesis adds to the literature by providing insight into how analysts evaluate disclosure quality and what managers are willing and able to deliver. The research documents attributes of disclosure quality that are regarded as important by financial analysts. While analysts are a key set of financial statement users, there are many other types of users. By understanding disclosure quality from a user's perspective, regulators and researchers are more able to anticipate the implications of a proposed change in disclosure rules. / Business, Sauder School of / Graduate

This research examines whether changes in the regulatory environment (Plain English Guidelines, Reg. FD and SOX), management pessimism, and meeting/beating or missing analyst forecasts have had an impact on earnings disclosure readability over the 1997-2007 timeframe and whether firm managers are able to make negative firm financial information less transparent to the market by making negative earnings disclosures less readable. The idea that management may attempt to reduce the impact of bad news by making it more costly to analyze is not new. However, studying the qualitative aspects of the unaudited earnings disclosures is a unique setting and extends previous work on annual report readability. This study finds that the Plain English Guidelines, Reg. FD and SOX had differential impacts on earnings disclosure readability. Additionally, it finds that earnings disclosure readability decreases as firm earnings decrease. Moreover, this study demonstrates that institutional investors contribute to earnings disclosure readability and may serve as monitors of management in this regard. Finally, firms that beat analyst forecasts have more readable earnings disclosures. This study not only contributes to the body of academic literature, but also informs regulators regarding their ability to induce firm management to write more informative earnings disclosures. / Ph. D.

This study uses the Securities and Exchange Commission's (SEC) comment letters to investigate the SEC's role as a monitor of financial reporting. I examine whether the SEC effectively comments on firms with poor disclosure quality. I utilize forward earnings response coefficients (FERC) as a measure of the market's perception of disclosure quality. I expect comment letter firms to have lower disclosure quality and thus lower FERCs. Secondly, within the firms selected for comment, I investigate whether the Division allocates a greater amount of resources towards firms with more severe disclosure deficiencies. Results indicate that comment letter recipients have significantly lower forward earnings response coefficients than non- recipients. Results also document that comment letter recipients have lower contemporaneous earnings response coefficients than non-recipients. These findings are consistent with the DCF being effective in selecting firms that are perceived by the market as having low disclosure and earnings quality. However, within comment letter firms, I am unable to provide any evidence that the DCF allocates more resources to firms with lower forward earnings response coefficients. / Ph. D.

One of the main aims of the underlying research is to respond to continuous calls for introducing and measuring a sound economic definition for best practice disclosure quality (e.g. Beyer et al., 2010) that is derived from a reliable guidance framework (Botosan, 2004) using an innovative natural language processing technique (Berger, 2011). It also aims to examine the impact of corporate governance on best practice disclosure quality. Finally, it aims to examine the joint effect of both best practice disclosure quality and corporate governance on firm value. The thesis contributes to disclosure studies in three principal ways. First, it introduces a new measure for best practice disclosure quality. Further tests show that the proposed measure is reliable and valid. A novel feature of this measure is that it captures all qualitative dimensions of information issued by the Accounting Standards Board, 2006 (ASB) Operating and Financial Review (OFR) Reporting Statement. Second, it uses machine-readable OFR statements for financial years ending in 2006-2009, and develops a language processing technique through constructing five keyword lists. Third, it examines the extent to which disclosure quantity provides a proper proxy for disclosure quality. The analysis shows that disclosure quantity is not a good proxy for disclosure quality. Accordingly, results derived, using quantity as a proxy for quality, are questionable. Results of the association between disclosure quality and corporate governance mechanisms suggest that the most effective governance mechanisms in improving disclosure quality are leadership structure, audit committee meeting frequency, and audit firm size. Using a wide set of corporate governance mechanisms, the study also contributes to three research strands and explains the inconclusive results in relation to the association between disclosure quality, corporate governance mechanisms and firm value. It provides empirical evidence as to which governance mechanisms promote the quality of voluntarily disclosed information in large UK firms. Additionally, it provides empirical evidence as to the joint effect of best practice disclosure quality, corporate governance mechanisms on firm value in the UK. Results also show that best practice disclosure quality enjoys a substitutive relationship with two corporate governance mechanisms (audit committee independence and audit committee size) and a complementary association with board independence in relation to firm value. The study has various research and policy implications. It suggests new research avenues for re-examining disclosure relationships, especially research areas that do not have persuasive conclusions such as the economic consequences of disclosure quality. Such research may inform both regulators and managers as to the costs and benefits of disclosure quality to both firms and stakeholders. It also provides feedback on the current disclosure practices by firms so that policy-makers can modify reporting frameworks/guidance accordingly.

The aim of this thesis is to examine the quality of the disclosure IAS 1 Presentation of Financial Statements, paragraphs 122 and 125 in the annual reports of Swedish publicly listed firms. These paragraphs state that firms are required to disclose judgments made by management in preparing financial statements that may have significant impact on the recognized carrying amount. These paragraphs should also include information about major sources of estimation uncertainty. A quantitative research approach is used and the sample consists of 1,519 annual reports over a 7-year period. We construct a disclosure index to assess the quality of the disclosures in Critical judgements and key sources of estimation uncertainty (IAS 1:122 and 1:125) note and categorize the annual reports into four index groups. Additionally, the number of headlines in the note are counted and sorted into three other groups, creating a headline index. Lastly, we multiply the disclosure index with the headline index to get a score, which then enable us to distinguish and rank the quality of disclosure between firms. Further, we count the number of words in each individual disclosure in each annual report. This additional quantitative data enable regression analyses, further ensuring objectivity in assessing the disclosure quality. Agency theory and political cost theory are used as base for determining which firm characteristics may affect disclosure quality. We examine the firm characteristics firm visibility, ownership concentration and leverage to investigate any relationship with disclosure quality. We use the ordinary least squares (OLS) regression method to analyse this data. The analysis shows that firm visibility and leverage have positive relationships with disclosure quality. This supports the political cost theory and suggests that firms that are more visible have stronger incentives to attain a high disclosure quality. Our findings also support debt-associated agency problems and are also in line with prior studies that found a positive relationship between disclosure quality and the degree of leverage, which indicates that disclosures reduces the information gap.

Recent events in the business world have focused attention on the importance of high quality financial reporting. Of particular interest is where the collapse of prominent companies such as Baring Plc. was due to the company's involvement with derivative instruments. In Australia, some derivative instruments are not recognised in the balance sheet. However, the Australian accounting standard AASB 1033 Presentation and Disclosure of Financial Instruments requires extensive disclosures to overcome the lack of guidance with regard to the recognition and measurement. Therefore, AASB 1033 may be regarded as a high quality disclosure standard. This thesis investigates the transparency or information quality of derivative disclosures of Australian firms in the extractive industries using 1998 to 2001 financial reports. The extractive industries play a major role in the Australian economy, where they generated exports worth more than A$30billion in 2000 to 2002 (Department of Foreign Affairs and Trade, 2003a and 2003b). Further, firms in the extractive industries extensively use derivative instruments for hedging purposes (Berkman, Bradbury, Hancock and Innes, 1997). The objective of this study is, first, to examine the relationship between the transparency or disclosure quality of derivative information and firm characteristics. Second, this study investigates the value relevance of derivative disclosures in particularly hedge information, net fair value information and risk information. Quality is measured based on a disclosure index developed from AASB 1033 Presentation and Disclosure of Financial Instruments. A finding of concern is that the majority of firms in this study provide less than complete information and therefore enforcement power is required to ensure compliance (Kothari, 2000) Prior studies have related disclosure quality of accounting information with firm characteristics but no attempt has been made to relate those characteristics with the disclosure quality of derivative instruments. The current study contributes to the literature by examining the relationship between firm characteristics and the quality of derivative disclosures. Firm characteristics investigated are size, profitability, price-earnings ratio, market-to-book ratio, research and development activity, auditor, debt-to-equity ratio and type of extractive firm. This study finds that the variables, firm size, price-earnings and debt-to-equity ratios are associated with the disclosure quality of derivative information. To a lesser extent, the variables, market-to-book ratio and profitability, are also associated with disclosure quality. High disclosure quality has been argued to lead to a reduction in the cost of debt (Sengupta, 1998) and equity (Botosan, 1997), resulting in higher security prices (Miller and Bahnson, 2002). The results of this study indicate that high quality derivative information, as represented by the disclosure index, is value relevant. Market participants do consider hedge information and risk information components as important for decision-making. However, examining the specific information disclosed in the financial statements indicate that some of the disclosed information such as the unrealised gain or loss on financial assets and liabilities and off-balance sheet derivative financial instruments are not significant. These results contribute to the value relevance literature as this study focuses on the extractive industries which have been neglected in the literature. This study provides important information for standard setters and regulators for future directions in developing accounting standards and is particularly relevant for the impending adoption of International Accounting Standards.

Cette thèse comprend trois essais dont l’objectif est d’étudier les déterminants et les implications de la qualité de l’information narrative des entreprises cotées. L’originalité de ce travail par rapport aux études antérieures réside dans le fait que nous nous intéressons à la dimension qualitative de l’information divulguée. Afin d’appréhender la qualité de cette information nous recourons à des techniques de traitement automatique de langage naturel qui permettent de construire des indices de lisibilité des rapports annuels.Le premier essai étudie l'effet de la complexité textuelle des rapports annuels sur la liquidité des titres. L’utilisation d’un échantillon d’entreprises françaises cotées en bourse sur la période 2002-2013 montre l’existence d’une relation positive entre le degré de lisibilité des rapports annuels et la liquidité des titres. Ces résultats suggèrent que la complexité textuelle de l’information narrative affecte les investisseurs sur le marché des actions.Le deuxième essai étudie l’effet de la lisibilité des rapports annuels sur le coût des fonds propres des entreprises. Nous menons notre étude empirique sur un échantillon d’entreprises américaines cotées en bourse sur la période 1995-2012. Les résultats montrent que les entreprises font face à un coût de financement plus élevé lorsque leurs rapports annuels sont moins lisibles, ce qui indique qu’un degré faible de lisibilité réduit la capacité des investisseurs à prévoir les performances futures de l’entreprise et leur amène par conséquence à demander un rendement de fonds propres plus élevé.Le troisième essai examine l’effet des pratiques de réduction d’impôt des entreprises sur la lisibilité de leurs divulgations financières. La littérature mobilisant la théorie d’agence montre que ces pratiques de réduction d’impôt créent un cadre permettant aux dirigeants d’extraire des bénéfices privés aux dépens des autres parties prenantes. Afin de s’assurer que leurs actions opportunistes ne soient détectées, les dirigeants réduisent la qualité de l’information divulguée, ce qui détériore l’environnent informationnel de l’entreprise en question. En utilisant un échantillon d’entreprises américaines cotées en bourse pour la période 1995-2012, nous constatons que les entreprises qui s’engagent dans des politiques de diminution d’impôt publient des rapports annuels moins lisibles et plus ambigus.Mot Clés: Information narrative; lisibilité des rapports annuels; Risque d’information ; Liquidité; Coût des fonds propres; Optimisation fiscale / This thesis comprises three separate but interconnected essays that focus on the determinants and economic implications of corporate narrative disclosure. The first essay examines the effect of annual report textual complexity on firms’ stock liquidity. Using techniques from computational linguistics, we predict and find that less readable filings are associated with lower stock liquidity. Our study provides evidence that difficult-to-read annual reports can act as a non-trivial impediment to investors’ ability to process information into useful trading signals. The findings are robust to a battery of sensitivity tests, including endogeneity, use of alternative regression techniques, and use of alternative liquidity and readability proxies.Using a large panel of U.S. public firms, the second essay presents the first evidence highlighting the relation between annual report readability and cost of equity capital. We hypothesize that complex textual reporting deters investors’ ability to process and interpret annual reports, leading to higher information risk, and thus higher cost of equity financing. Consistent with our prediction, we find that greater textual complexity is associated with higher cost of equity capital. Our results are statistically significant and economically important. We also show that disclosure tone exerts a non-trivial bearing on the cost of equity. Our findings are robust to a battery of sensitivity checks, including use of multiple estimation methods, alternative proxies of annual report readability and cost of equity capital measures, and potential endogeneity concerns. Overall, our study contributes to the research examining the relation between disclosure quality and cost of capital.The third essay investigates the effect of firms’ tax avoidance practices on the textual properties of their annual filings. Using a large sample of U.S.-listed firms, we document a positive and statistically significant relation between corporate tax avoidance and annual report textual complexity. In addition, we show that managers of tax-avoiding firms tend to hide their avoidance behavior in more ambiguous language. Our results prove to be robust to the use of numerous alternative proxies of corporate tax avoidance and annual report readability. The findings are also robust to a number of checks, including, using additional control variables, employing alternative regression methodologies, and addressing endogeneity concerns.Keywords: Narrative disclosure; Annual report readability; Disclosure tone; Information risk Stock liquidity; Cost of equity capital; Corporate tax avoidance

Large European auto manufacturers are responsible for being at the forefront when the industryis advancing towards a more sustainable practice. However, there is a problem with assessing companies´ sustainability performance because it can be camouflaged through low-quality reporting, preventing stakeholders from scrutinizing companies’ commitment to sustainable development. Instead, a substantive reporting practice where companies show their actualsustainability performance through high-quality reporting is preferable. Nonetheless, existing research fails to explain the changes in sustainability reporting practices, as there is limited research focusing on European auto manufacturers and much of the research only covers one specific point in time. This thesis will investigate changes in the disclosure quality of 4 large European auto manufacturers over five years and answer how their sustainability reporting practices have changed by analyzing 20 sustainability reports through quantitative content analysis. The findings signal a move toward more substantive sustainability reporting where two companies significantly increased, and two had minor advancements. It indicates less camouflaging of sustainability performance which is crucial to promote sustainable development and provide incentives to transition towards sustainable practices. However, the information did not become more accurate, which caused concerns as auto manufacturers may have found other ways to camouflage sustainability performance.