THE ASSOCIATION BETWEEN VOLUNTARY DISCLOSURE, ACCRUAL LEVELS, AND ACCRUAL MISPRICING

Abstract

Prior research shows that the accruals are less persistent than cash flow and that investors overweight the persistence of accruals. Prior research also shows that voluntary disclosure is a management tool that can reduce information asymmetry. In this study, I extend both streams of research by investigating the association between voluntary disclosure and firms’ accruals. I begin by exploring the association between the magnitude of absolute accruals and the probability of observing an increase in voluntary disclosures. I find evidence that suggests managers increase disclosures as the magnitude of absolute accruals increases. This result is consistent with an increase in voluntary disclosure when the likelihood of equity mispricing increases or when earnings are less informative. Next, I investigate whether voluntary disclosures associated with earnings-announcement conference calls affect investors’ assessments of the persistence of current accruals for future earnings. I document that conference calls are inversely related to the mispricing of accruals. That is, accrual mispricing persists for non-conference-call firms and accruals appear to be accurately priced for conference-call firms, consistent with voluntary disclosure reducing the information asymmetry associated with accruals.