The Magnitude of Quantitative Disclosure in Annual Reports

Abstract

Regulators have expressed concern about high levels of immaterial information (i.e., information that fails to influence a current or prospective stakeholder) in annual reports. I examine the determinants of one component of disclosure materiality – the magnitude of quantitative annual report disclosures relative to assets – to better understand why firms disclose seemingly “immaterial” information although they are not required to. I find that firms provide lower magnitude disclosure when macroeconomic uncertainty, litigation risk, or manager-level risk-aversion are greater, which indicates that firms tend to disclose smaller dollar amounts to mitigate the risk of failing to disclose material information. While I find some evidence that annual reports with higher levels of small magnitude disclosure appear to be more difficult for some investors to process, I also find that firms are significantly less likely to be sued when they disclose smaller magnitude information. Overall, these results imply that regulators might improve quantitative disclosure materiality by providing more legal protection for firms and managers as they make decisions about disclosure materiality.

Keywords: materiality; annual report disclosure; mandatory disclosure; voluntary disclosure; litigation risk; investor risk assessments

JEL Classification: G10, M41, M45