Determinants of Quantitative Information Withholding in Annual Reports

Abstract

In recent years, the determinants of voluntary disclosure have been explored in an extensive body of empirical research. One major limitation of those studies is that none has tried to find out whether voluntary disclosures were occasional or continuous over time. Yet this point is particularly important, as the voluntary disclosure mechanism can only be fully effective if the manager consistently reports the same items. This paper examines the factors associated with the decision to stop disclosing an item of information previously published voluntarily (henceforth ‘information withholding’ or IW). To measure information withholding, we code 178 annual reports of French firms for three consecutive years. Although disclosure scores are relatively stable over time, we find that this does not mean there is no change in voluntary disclosure across the years. We document that IW is a widespread practice: on average, one voluntary item out of seven disclosed in a given year is withheld the following year. We show that information withholding is mainly related to the firm's competition environment, ownership diffusion, board independence and the existence of a dual leadership structure (separate CEO and chairman).

Acknowledgements

Jeanjean acknowledges the financial support of the HEC Foundation (project F0802) and of the INTACCT programme (European Union, Contract No. MRTN-CT-2006-035850). Depoers is a member of the PESOR; Jeanjean is a member of the GREGHEC, CNRS Unit, UMR 2959. We thank Desmond Tsang for his comments as well as workshop participants at the 2007 European Accounting Association annual congress and at the 2009 Canadian Accounting Academic Association annual meeting. We acknowledge the quality of the reviewers' comments: their suggestions helped us to improve the paper considerably. All remaining errors are ours. The authors thank Ann Gallon for her much appreciated editorial help.

Notes

Lang and Lundholm (1993) note on page 267 that ‘firms’ disclosure policies may be ‘sticky’ from year to year. For instance, casual observation of annual reports suggests that their general content remains relatively constant over time'.

Although the fall in firm value will be smaller if the bad news is disclosed.

Website content and design in particular are frequently updated (Abdelsalam et al., 2007) and the sites must be continuously monitored to obtain comparisons that are reliable over time. The decision to use two fixed dates (necessary for a sample study) would therefore not only be arbitrary, but would involve a high risk of bias in the measure of IW, since temporary disclosure phenomena could occur between the two dates.

France has not adopted any law similar to the Fair Disclosure Regulation enacted in the US.

The French Commercial Code (article L 235-245) stipulates that all information published by listed firms in their annual report must be audited.

According to Diamond (1985), ‘there exists a policy of disclosure of information which makes all shareholders better off than a policy of no disclosure. The welfare improvement occurs because of explicit information cost savings and improved risk sharing. This provides a positive theory of precommitment to disclosure, because it will be unanimously voted for by shareholders and will also represent the policy that will maximize value ex ante’.

Calculating these items would be very time-consuming and require considerable expertise and resources on the part of the investor, especially as the format of financial statements is not completely standardized in France. For instance, balance sheets can be presented by term or by nature, which complicates the computation of net debt. In the same vein, income statements can be classified by function (as in the US) or by nature (instead of reporting R&D expenses, SG&A expenses, etc, expenses may be classified as ‘Personnel expenses’, depreciation, external charges, etc). This can make it difficult to compute operating profitability ratios.

HHI and SPA reflect different aspects of competition. The HHI reflects market share competition between firms within a single year. The speed of profit adjustment reflects competition for abnormal profits over time, regardless of firm size. Note that this measure is capable of capturing competition between a few large firms in a concentrated industry while the concentration ratios are not.

We would like to thank one reviewer for this suggestion.

Additional information

Notes on contributors

Florence Depoers

Paper accepted by Salvador Carmona.

Thomas Jeanjean

Paper accepted by Salvador Carmona.