Earnings Performance and Discretionary Disclosures

Abstract

While the influence of earnings performance on disclosure is a fundamental issue in the disclosure literature, our understanding of this influence is limited. In this paper, I examine a comprehensive set of disclosures from a sample of firms experiencing an extended period of seasonally adjusted increases in earnings. I study how these firms adjust disclosure in response to earnings increases, how disclosure changes as the period of strong earnings performance nears an end and how firms disclose during a subsequent period which includes earnings declines. I find an increase in disclosure during the period of increased earnings. This increase is pervasive across all types of disclosure and tends to be bundled with earnings announcements. The market responds positively to this disclosure including a positive response to information bundled with earnings, even after controlling for the current earnings. Firms continue to disclose at a high-level as they approach subsequent earnings declines. However, they shift disclosure to focus on the positive short-term results and do not discuss the impending decreases. While this behavior is systematic, the market does not appear to anticipate the subsequent earnings declines. Once the firms begin to announce earnings declines, the magnitude of disclosure returns to the level provided prior to the increased earnings. However, the mix of disclosure is different, suggesting managers choose the form of disclosures based on the type of news they are providing.

JEL Classification: M41, M45, D82, D84, G14, K22