The Materiality of Quantitative Disclosure in Annual Reports

Abstract

Firms are not required to disclose immaterial information (i.e., information that fails to influence a current or prospective stakeholder). Nevertheless, regulators have recently called attention to high levels of immaterial disclosure in firms’ annual reports, and express concern that such disclosure makes it difficult for investors to identify and respond to information that is relevant for their decision-making. I examine the determinants of disclosure materiality for quantitative disclosures in annual reports (i.e., the magnitude of quantitative disclosure relative to firm assets). I find that the disclosure of lower materiality information is positively associated with macroeconomic uncertainty, firm-level litigation risk, and manager-level risk-aversion, but not with a manager’s incentive to obfuscate. Finally, I find some evidence that lower materiality disclosure is associated with negative capital market consequences. Overall, these results imply that regulators might be able to improve the materiality of quantitative disclosure by (1) reducing ‘one-size-fits-all’ disclosure regulations, and (2) providing more legal (i.e., safe harbor) protection for firms and managers as they make decisions about disclosure materiality.

Keywords: materiality, annual report disclosure, mandatory disclosure, voluntary disclosure, capital markets

JEL Classification: G1, M41, M48