The Complementary Roles of Audited Financial Reporting and Voluntary Disclosure: A Test of the Confirmation Hypothesis

64 Pages Posted: 17 Oct 2009  

Ray Ball

University of Chicago - Accounting

Sudarshan Jayaraman

University of Rochester - Simon Business School

Lakshmanan Shivakumar

London Business School

Date Written: October 16, 2009

Abstract

We examine the complementarity between voluntary disclosure and reporting audited financial statement outcomes. We test the “confirmation” hypothesis, that reporting audited, backward-looking outcomes disciplines and hence enhances the precision and credibility of managers’ disclosure of private forward-looking information. Using management earnings forecasts as the voluntary disclosure variable, we report that committing to higher audit fees (a measure of the extent of financial statement verification and thus the accuracy and freedom from manipulation of reported outcomes), is associated with more frequent and more specific management forecasts, and with a larger market reaction to forecasts. These relations are not driven by litigation risk and are robust to a variety of controls. Disclosure of private information and audited financial reporting play complementary roles, which implies they cannot be evaluated separately.

Keywords: Voluntary disclosures, earnings announcements, confirmation hypothesis

JEL Classification: M43, M49

Suggested Citation

Ball, Ray and Jayaraman, Sudarshan and Shivakumar, Lakshmanan, The Complementary Roles of Audited Financial Reporting and Voluntary Disclosure: A Test of the Confirmation Hypothesis (October 16, 2009). Available at SSRN: https://ssrn.com/abstract=1489975 or http://dx.doi.org/10.2139/ssrn.1489975

Ray Ball (Contact Author)

University of Chicago - Accounting ( email )

Sudarshan Jayaraman

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Lakshmanan Shivakumar

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

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