Usefulness of disclosure

Question 1

What does Healy & Palepu (2001) say and what are the four (4) points under this author?

Answer 1

• Economic consequences of voluntary disclosure.

1. Improve liquidity in the capital market.
   - reduces information asymmetry => boosting investor’s confidence and fair price of the stock transactions => improve trading activity => improve liquidity.
2. Lower cost of capital.
   - investors spend less time in searching and obtaining information but more time on investment opportunities.
   - costs in terms of time + money, reduced. Companies can easily obtain funds.
   - lower required rate of returns => can predict the profitability and sustainability of the company => lower risk, lower require rate of returns.
3. Changes in the information intermediaries (+ve / -ve).
   * +ve: easier for analysts to provide forecastings and recommendations => increases the demand of their services in the capital market.
   * -ve: no private information to possess and channel to investors by analysts => reducing their service demand.

Question 2

What do Elliot & Jacobson (1994) from the entity’s perspective, say and what are the four (4) points under this author?

Answer 2

lower cost of capital = the risk-free rate of return + the premium for economic risk.

• Business Information disclosure from the entitiy’s perspectives.

1. Helps understand the economic risk = lower of cost of capital.
   # problem of misinterpretation of economic risk = overpriced stock market.
2. Competitive disadvantage
   # giving information to the competitors such as:
   - innovation (production, quality improvement)
   - strategies, plans and tactics (planned product development, new market targeting)
   - operation (segment sales, product cost figures)
   # effects depend on: timing, level of detail and targeted audience.
3. Public relation’s benefits
   # signals investors and stakeholders that the company is transparent, accountable and has responsible business practices.
   # also helping them to be different in the market.

Question 3

What do Elliot & Jacobson (1994) from the non-owner investors, say and what are the two (2) points under these authors?

Answer 3

Lower uncertainty and ambiguity.

1. Reduce the cost and risk of information.
   # Lower cost of capital.
2. Free riders
   # gives the same level of access to all investors => regardless of whether they are actively participating in analysis or investment decision-makings.
   # investors who do not contribute to the cost of obtaining and analysing this information can just gain insights from the disclosed information.

Question 4

What do Elliot & Jacobson (1994) from the national interest’s perspectives, say and what are the four (3) points under this author?

Answer 4

Financial and human capital

1. Benefit from effectively allocated capital at a lower cost
   # human and financial capital
2. Higher job creations => higher living standards
3. Higher competition among businesses (from national’s POV)

Question 5

Arguments against higher disclosure?

Answer 5

1. Competitive disadvantage.
2. Free riders.
3. Changes in information intermediaries.
4. Higher competition leads to higher costs among businesses.

Question 6

Lundholm & Winkle (2006)? Explain the effects.

Answer 6

excessive use of jargon words, backword-looking statement,

1. Significant relationship between the quantity of disclosure and firm performance. (800 firms)
2. Bad news leads to a remarkably short-sighted disclosure and a low level of detail. Effects:
   # excessive use of jargon words
   # backward looking statements
   # not addressing underlying issues
   # no meaningful contexts

Question 7

Campbell et. al (2008)?

Answer 7

2: The CEO’s statements are more useful than the Chairman’s statements because the former contain more information about the future.

1. Interviewed sell-side analysts in the banking sector.
2. Findings:
   #1: Generally believe that the narrative reporting was not immediately useful for their forecasting models and written reports.

Question 8

Coram et al (2011)

Answer 8

1: negative trend: greater attention to financial information.

1. To examine whether the enhanced disclosures of non-financial indicators influence analysts’ decision-making processes. depending on the trends.

Question 9

Explain backward-looking vs forward-looking disclosures. Whether they are useful?

Answer 9

1. Two types of reporting: forward-looking and backward-looking.
   => Backward looking: past financial results and their related disclosures (described as ‘stagnation’)
   => Traditional annual reports: generally retrospective and do not offer future prospects or crucial risks that may be relevant in the
   - future economic environment is too dynamic to rely only on backward-looking information

=> Forward looking : refers to current plans and future forecasts => informations about the company’s future prospects
=> (eg: # financial: future capital expenditures, earnings targets, cash flow forecasts # non-financial: targets, risks and uncertainties).

Forward-looking disclosures often associated with:
1. Company size.
2. Auditing firms.

Pros and Cons of forward-looking disclosure:
1. Cons: # Provide information to the competitors # Exposed to litigation costs.