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Disclosure frequency and information asymmetry

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Abstract

The main purpose of this paper is to investigate whether more frequent disclosure by firms is associated with lower levels of information asymmetry among investors. Using a panel of 386 firms in the US retail sector, I find that the practice of regularly providing monthly revenue disclosures is not associated with reduced information asymmetry. In contrast, I find that more detailed (greater quantity) disclosure is associated with reduced information asymmetry. I provide preliminary evidence that the distinction between disclosure frequency and disclosure quantity is due to more frequent disclosure providing an incentive for increased private information acquisition by sophisticated investors. The results indicate that the relation between disclosure and information asymmetry is multi-dimensional and varies depending on the disclosure attribute being studied.

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Notes

  1. Regulation FD is the most striking example of the SEC’s desire for a level playing field.

  2. Mensah and Werner (2008) provide a comprehensive list of country-by-country reporting frequencies.

  3. Examples include Castellano (2002) and Pitt (2001).

  4. In their study of disclosure frequency and volatility, Mensah and Werner (2008) take advantage of American ADRs of British and Australian companies to address this concern. Like Mensah and Werner, my focus is on variation in the ex ante commitment to disclose at a particular frequency, rather than the ex post observation that some firms issue more press releases/management forecasts/other disclosures than other firms. Focusing on the commitment to disclose information on a more frequent, recurring basis speaks to the decision faced by regulators in setting mandated disclosure frequencies.

  5. Examples include Coller and Yohn (1997); Brown et al. (2004); Welker (1995); and Leuz and Verrecchia (2000).

  6. This could also be interpreted as a reduction of information asymmetry between firm insiders and outsiders (Frankel and Li 2004).

  7. Another effect could come in the form of managers increasing the frequency of one type of disclosure, but reducing other voluntary disclosures (Gigler and Hemmer 1998). I include a measure of other voluntary disclosure in my regressions to account for this possibility.

  8. An alternative way to study variation in disclosure frequency is to measure how frequently firms issue any type of public disclosure. This approach is taken by Jo and Kim (2007), who examine the relation between disclosure frequency and earnings management. There are two distinctions between their approach and the sample used in this study. First, their measure of disclosure frequency (as they note) is determined both by disclosure strategy and by the frequency of information events, which complicates the analysis. More importantly, my study focuses on variation in periodic disclosures that occur at regular intervals, convey a consistent type of information, and are scheduled so that investors can anticipate when the disclosures will occur. Thus, my sample bears a strong resemblance to the type of disclosure frequency that regulators are likely to be considering in terms of interim reporting.

  9. In order to confirm that this variable captures meaningful information similar to Francis et al. (2002), I studied 40 random earnings announcements split between the top and bottom quintiles of earnings announcements. I find that the primary driver of higher word counts is the inclusion of detailed income statements, balance sheets, and segment/division information.

  10. This sample selection procedure avoids a requirement that sample firms have some level of analyst following, as many prior studies require. It also avoids the survivorship bias that would exist if I had chosen all firms existing at the end of the sample period.

  11. This precludes me from identifying many retail firms as “frequent reporters” for the last calendar quarter of each year, as many retailers disclose Holiday or December sales regardless of whether they disclose monthly sales throughout the remainder of the year.

  12. Empirical evidence confirms these claims: the autocorrelation in the decision to report monthly sales is 0.97.

  13. One caveat applies to the univariate analysis in Table 4: In order to test for differences in means, I account for the pooled nature of the data by regressing the variable of interest on the frequency dummy variable, using standard errors that account for the cross-sectional and intertemporal correlation of observations. In contrast, the test for differences in medians is a simple pooled rank-sum test, which does not correct for the pooled nature of the data. Thus, differences in means should be viewed as more reliable than differences in medians. However, I present both methods for completeness.

  14. A similar pattern exists for the entire sample (both monthly reporters and non-monthly reporters) around quarterly earnings announcements. That is, there is significantly higher information asymmetry on the 5 days prior to the earnings announcement and significantly lower levels on the 5 days following the announcement, as well as higher spreads and depths on the day of the announcement.

  15. This methodology is consistent with prior studies of predisclosure information levels, such as Atiase (1985) and Shores (1990).

  16. Results are unchanged if the value-weighted index is used in the calculation of AAR or if the AAR is measured as the absolute raw return for the firm during the earnings announcement period.

  17. Leuz and Verrecchia (2000) use a similar methodology.

  18. As an illustration of how reporting firms tend to disclose their monthly sales figures, 74.4% of all announcements fall on the “common reporting date” for each month and 83.4% of all announcements fall within 1 day on either side of the common reporting date. Thus, if there is information transfer occurring, it is extremely likely that it would occur on or around this common reporting date.

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Author information

Authors and Affiliations

  1. Fisher College of Business, Ohio State University, 2100 Neil Avenue, Columbus, OH, 43210, USA

    Andrew Van Buskirk

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  1. Andrew Van Buskirk
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Correspondence to Andrew Van Buskirk.

Additional information

This paper is based on my dissertation at the University of Pennsylvania and was formerly titled “Capital Market Effects of More Frequent Disclosure.” I thank the members of my committee, John Core (chair), Wayne Guay, David Larcker, Christian Leuz, and Andrew Metrick, for their many insightful comments and suggestions. I also thank Phil Berger, Robert Holthausen, Jonathan Rogers, Cathy Schrand, Robert Verrecchia, and seminar participants at Dartmouth College, Duke University, Harvard University, M.I.T., Northwestern University, Pennsylvania State University, the University of Chicago, the University of Michigan, the University of Pennsylvania, the University of Rochester, and the University of Southern California for helpful comments and suggestions. I am grateful to the Deloitte Foundation for financial support.

Appendices

Appendix 1: Typical Wall Street Journal story on retail sales

The Economy

Luxury Stores Were Holidays’ Stars — Overall Retail Sales Rose 3.2%, Slowed by Discounters; Holdout Shoppers Also Hurt

By Stephanie Kang

1089 words

6 January 2006

The Wall Street Journal

A2

English

(Copyright (c) 2006, Dow Jones & Company, Inc.)

Holiday shoppers spent big on a few products last month, but held out for last-minute deals, resulting in mixed performances from US retailers. Cash registers rang at luxury retailers and teen specialty shops, but sales at Wal-Mart Stores Inc. disappointed.

Overall, sales at stores open at least a year, a measure known as same-store sales, rose 3.2% in December from a year earlier, according to an index of 66 chains compiled by the International Council of Shopping Centers. The trade group, based in New York, had expected same-stores sales growth between 3% and 3.5%. According to the tally, same-store sales at luxury stores grew 6.4%, while discounters ticked up just 2.6%.

“All combined it was good, not great,” said Jeff Klinefelter, senior research analyst at Piper Jaffray. “When we finally got the last-minute rush, it was the higher-end consumer that followed through with spending.”

Economists watch same-store sales as one sign of overall US consumer-spending trends. But not all chains, including some of the largest retailers, report sales on a monthly basis. The reports also miss many online purchases and other kinds of retail spending.

Wal-Mart, Bentonville, Ark., the world’s largest retailer, said same-store sales at its US locations grew just 2.2% in December, a week after it said it was expecting same-stores at the lower range of its previous 2% to 4% forecast. Wal-Mart’s number was shy of the 2.4% estimated from an average of analysts surveyed by Thomson Financial.

Wal-Mart offered early and deep discounts this holiday season, a reversal from a year earlier. The approach was successful, but the momentum generated in November didn’t continue throughout the season.

The company’s results were dragged down by a weak 1.9% same-store sales increase from its core Wal-Mart Stores division; the Sam’s Club warehouse division contributed same-store sales growth of 3.6%. Total December sales increased 6.3%, including overseas stores. The company said yesterday it now expects fourth-quarter earnings at the low end of a per-share forecast of 82 cents to 86 cents.

This year, shoppers, eager for last-minute discounts, waited to purchase gifts. “They were really much more down to the wire,” said Michael Niemira, chief economist at the International Council of Shopping Centers.

Mr. Niemira said the Friday before Christmas was one of the biggest shopping days of the entire season. The biggest shopping day is usually the Saturday before the holiday. This year, Christmas fell on a Sunday, which was also the first day of Hanukkah. Meanwhile, in New York City, a three-day transit strike the week before Christmas may have spurred some very last-minute shopping in that city.

Target Corp., Minneapolis, posted a same-store sales gain of 4.7%, narrowly beating the 4.6% analysts had estimated. Total December sales grew 12%. Target Chairman and Chief Executive Bob Ulrich said, “We are pleased with our performance during this year’s holiday season and remain comfortable with our outlook for the year overall.”

Costco Wholesale Corp., Issaquah, Wash., also beat analysts’ expectations, as it posted same-store sales growth of 7%, including overseas stores. But Dollar General Corp., Goodlettsville, Tenn., said same-store sales decreased 2.8%, missing analysts’ expectations of a 1.9% increase. The discounter said sales were negatively affected by high gasoline and heating-fuel prices and “pressure on consumers’ discretionary spending.” For the fourth quarter, the company said it expects a low single-digit decrease in same-store sales and earnings of 48 cents to 52 cents.

Luxury retailers rang up the strongest results in December. Nordstrom Inc., Seattle, said same-stores sales jumped 7.7% for the month, easily topping the 3.8% analysts had expected. Total December sales grew 11%.

Same-store sales at Federated Department Stores Inc.’s Macy’s and Bloomingdale’s chains grew 3.4%, surpassing the 2.1% Wall Street had forecast. Total December sales for the Cincinnati company doubled, mainly because of the acquisition of May Department Stores Co., which was completed in August.

Department stores catering to moderate consumers didn’t fare as well. J.C. Penney Co., Plano, Texas, reported same-store sales growth of 2.2%. Total December sales of the company’s department stores grew 3.1%.

Sears Holdings Corp., operator of the Sears, Roebuck & Co. and Kmart chains, said that same-stores sales at Kmart for November and December grew 1%. That is the first such increase reported by the Kmart chain since its emergence from Chapter 11 bankruptcy-court protection in May 2003. Higher apparel sales at Kmart stores were partially offset by a decline in home goods, the company said. Still, the Hoffman Estates, Ill., retailer said it expects fourth-quarter earnings in a range that, on average, exceeds a consensus of Wall Street analysts.

Certain teen retailers were standouts at the mall last month. Shares of Aeropostale Inc. jumped yesterday after the New York retailer reported a same-store sales increase of 11% and raised its fourth-quarter earnings guidance. Analysts had expected same-stores sales for December of 4.3%. Aeropostale was among the biggest discounters in the mall this holiday, holding 50% off the entire store throughout much of the season.

Rival American Eagle Outfitters Inc., which also offered discounts throughout the season, reported a same-store sales increase of 9.8%, also beating expectations. Total December sales for the Warrendale, Pa., company grew 16%.

Others posted strong results without the markdowns. Among the biggest winners of the season was Abercrombie & Fitch Co., New Albany, Ohio, which said same-store sales leapt 29% for the month, easily surpassing the 18% Wall Street had expected. Total sales grew 41%.

Markdowns didn’t seem to help specialty shops such as Gap Inc., which posted a same-store sales drop of 9%; analysts had expected a drop of just 3.8%. Still, the San Francisco retailer, which operates Gap, Banana Republic and Old Navy apparel chains, said it expects earnings for the year at the higher end of its range of $1.12 to $1.17 a share.

Appendix 2: Sample sales disclosure

bebe stores, inc. Announces October 2005 Sales; Same Store Sales Increase 2.1%

BRISBANE, CALIF.—November 3, 2005—bebe stores, inc. (Nasdaq: BEBE) today reported retail sales of $39.1 million for the 4-week period ended October 29, 2005, an increase of 10.5% compared to sales of $35.4 million for the 4-week period ended October 30, 2004.

Same store sales for the four-week period ended October 29, 2005 increased 2.1% compared to an increase of 30.6% for October 2004.

Retail sales for the year-to-date period ending October 29, 2005 were $164.3 million compared to $137.7 million for the year-to-date period ending October 30, 2004, an increase of 19.3%. Same store sales for the year-to-date period ending October 29, 2005 increased 13.3% compared to an increase of 16.6% for the year-to-date period ending October 30, 2004.

As of October 29, 2005, finished goods inventory per square foot was approximately 5% higher as compared to the prior year.

bebe stores, inc. provides additional information on a recorded message. Interested parties are invited to listen to the message by calling 1-877-232-3757.

bebe stores, inc. designs, develops and produces a distinctive line of contemporary women’s apparel and accessories, which it markets under the bebe, BEBE SPORT and bebe O brand names. bebe currently operates 224 stores, of which 170 are bebe stores, 19 are bebe outlet stores and 35 are BEBE SPORT stores. These stores are located in the United States, Puerto Rico and Canada. In addition, we have an online store at bebe.com.

The statements in this news release, other than the historical financial information, contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ from anticipated results. Wherever used, the words “expect,” “plan,” “anticipate,” “believe” and similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties and the company’s future results of operations could differ materially from historical results or current expectations. Some of these risks include, without limitation, miscalculation of the demand for our products, effective management of our growth, decline in comparable store sales performance, ongoing competitive pressures in the apparel industry, changes in the level of consumer spending or preferences in apparel, and/or other factors that may be described in the company’s annual report on Form 10-K and/or other filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenues and profitability are difficult to predict.

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Van Buskirk, A. Disclosure frequency and information asymmetry. Rev Quant Finan Acc 38, 411–440 (2012). https://doi.org/10.1007/s11156-011-0237-0

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