Consequences of Interim Reporting: A Literature Review and Future Research Directions

Abstract

This study provides the first comprehensive literature review on interim reporting based on 112 papers published between 1961 and 2020. The review focuses on both the firm-specific consequences (capital market-based and real effects) and externalities of interim reporting. We analyze three primary interim reporting characteristics: (1) frequency, (2) contents, and (3) assurance. The review allows us to summarize the existing literature, reconcile different findings, identify trends in the literature, and present avenues for future research. We observe that investors perceive interim reports to be useful. However, no clear evidence exists for strong capital market-based benefits of higher reporting frequency, such as increases in liquidity. Higher reporting frequency seems to imply stricter monitoring, especially in the absence of other effective monitoring mechanisms. Nonetheless, it can also induce myopic decision-making. More comprehensive reports convey more information at the costs of increases in reporting lags and processing time. Surprisingly, the current literature does not find that interim assurance leads to higher interim report quality.

Keywords:

• Interim reporting
• Reporting frequency
• Interim assurance
• Literature review

JEL codes:

• D82
• G14
• G18
• M41
• M42
• M48

Acknowledgements

We thank Christoph Mauritz, Max Meinhövel, Christopher Oehler, Alicia Schott, Hervé Stolowy (editor), Stephen A. Zeff, and two anonymous reviewers for their helpful comments and suggestions. All remaining errors are ours.

Notes

1 On 17 August 2018, Donald Trump tweeted: ‘In speaking with some of the world's top business leaders I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!’

2 Regarding ‘assurance’, we refer to the verification of interim reports by external auditors in the form of audits, reviews, or other types of assurance. In contrast to full audits of annual financial statements (communicated as a ‘positive statement’), interim assurance is often limited to reviews (e.g., SEC's Rule 10-01(d) of Regulation S-X). These reviews are based on less sophisticated assurance procedures and provide a lower assurance level (communicated as a ‘negative statement’; Kajüter et al., 2016).

3 Some studies address more than one of these characteristics.

4 Although IMS do not necessarily contain earnings, we consider them as interim reports because firms often decide to publish earnings within IMS. For example, Ernstberger et al. (2017) find that more than 50% of the public firms in the EU-15 disclose earnings in their IMS.

5 For studies on the determinants of interim reporting characteristics, refer to Leftwich et al. (1981), Burton (1981), Schipper (1981), Botosan and Harris (2000), and Link (2012).

6 The ranking is available under https://vhbonline.org/fileadmin/user_upload/JQ3_RECH.pdf. VHB-JOURQUAL 3 is among the leading initiatives that rank relevant journals in the field of business administration and its subfields (e.g., accounting). It ranks journals according to their quality of research publications from A+ (best) to D. VHB-JOURQUAL 3 contains all accounting journals included in other rankings such as the FT 50 ranking, all accounting journals rated 4 or 4* according to the Academic Journal Guide 2018 by ABS, and several additional journals. We also include papers published in ‘The Journal of Business’, an influential journal that was discontinued in 2006.

7 We present search phrases and further details on the search process in Appendix 1.

8 To verify our search results, we also employed Google Scholar, which did not lead to the inclusion of any papers that our initial search missed.

9 The search revealed many more papers, which do not deal with issues related to interim reporting. We do not consider these papers.

10 We obtain citations from Web of Science. Panel C is based on 81 papers out of our final sample of 112 papers because Web of Science does not provide citations for the remaining papers.

11 For further discussions of Green and Segall (1966), refer to Holton (1966) and Welsch (1966).

12 For further discussions of this study, refer to Green and Segall (1968) and Niederhoffer (1970).

13 For further discussion of this study, refer to Barnea et al. (1972).

14 For further discussion of this study, refer to Kennelly (1972).

15 For further discussion of this study, refer to Wiedman (2009).

16 Most studies focus on the US, where the filing of half-yearly (quarterly) reports is mandatory since 1955 (1970) and where the issuance of voluntary IEA before the filing is very common (e.g., Balsam et al., 2002).

17 For further discussions of this study, refer to Edwards (1971) and Weston (1971).

18 For the determinants of the timing of quarterly EAs, refer to Bowen et al. (1992).

19 For further discussion of this study, refer to Dye (1998).

20 In line with this hypothesis, Schleicher and Walker (2015) find decreases in voluntary disclosures after the introduction of mandatory IMS in the UK.

21 For further discussion of this study, refer to Verdi (2012).

22 Meanwhile, more frequent reporting leads to liquidity increases in his model, which is, however, not supported by the empirical evidence in Section 4.1.3. For further discussion of the underlying assumptions of Yee’s (2004) model, refer to Tippett (2004).

23 For further discussions of this study, refer to Brown et al. (1980) and Abdel-Khalik (1983).

24 Here, a recent working paper of Stoumbos (2019) may offer interesting insights because he finds that liquidity gradually decreases between quarterly EAs, thus indicating opportunities for private information acquisition between the announcements.

25 In early years of interim reporting research, an intense normative discussion emerged regarding the purpose and concept underlying interim reporting; namely, the integral, the discrete, and mixed approaches (e.g., Bollom & Weygandt, 1972; Fried & Livnat, 1981; Fried & Livnat, 1985; Green, 1964; Hassler & Buckmaster, 1975; Hopwood & Newbold, 1985; Kiger, 1974; Kiger, 1975; Rappaport, 1966; Shillinglaw, 1961). Moreover, few empirical studies address this issue (Bollom, 1973; Mendenhall & Nichols, 1988; Palepu, 1988). Today, most jurisdictions have agreed on the usage of mixed approaches for the preparation of interim financial statements. Thus, we do not discuss this issue in further detail.

26 For further discussion of this study, refer to Ertimur (2007).

27 For an overview, see Francis (2011) or Knechel et al. (2013).

28 For the determinants of the decision to buy voluntary interim assurance, see, e.g., Ettredge et al. (1994) or Mangena and Tauringana (2008).

29 The SEC has mandated timely quarterly reviews since 2000 without providing the possibility for retrospective reviews (Manry et al., 2003).

30 For further discussion of this study, refer to Filip (2016).