Review of Accounting Studies

, Volume 15, Issue 1, pp 179–219 | Cite as

Disclosure of GAAP line items in earnings announcements



We provide new evidence on the disclosure in earnings announcements of financial statement line items prepared under Generally Accepted Accounting Principles (GAAP). First, we investigate the circumstances that might provide disincentives generally for GAAP line item disclosures. We find that managers who regularly intervene in the earnings reporting process limit disclosures at the aggregate level and in each of the financial statements so as to more effectively guide investor attention to summary financial information. Specifically, this disclosure behavior obtains when managers habitually cater to market expectations, engage in income smoothing, or use discretionary accruals to improve earnings informativeness. Second, we predict and find that the specific GAAP line items that firms choose to disclose are determined by the differential informational demands of their economic environment, consistent with incentives to facilitate investor valuation. However, these valuation-related disclosure incentives are muted when managers habitually intervene in the earnings reporting process.


Disclosure incentives Financial statement information Valuation Earnings announcement 

JEL Classification

M4 D8 K2 G1 


  1. Adhikari, A., & Duru, A. (2006). Voluntary disclosure of free cash flow information. Accounting Horizon, 20, 311–332.CrossRefGoogle Scholar
  2. Alexander, J. C. (1991). Do the merits matter? A study of settlements in securities class actions. Stanford Law Review, 43, 497–598.CrossRefGoogle Scholar
  3. Altman, E. I. (1968). Financial ratios, discriminant analysis, and the prediction of corporate bankruptcy. The Journal of Finance, 23, 589–609.CrossRefGoogle Scholar
  4. Amir, E., & Lev, B. (1996). Value-relevance of nonfinancial information: The wireless communication industry. Journal of Accounting and Economics, 22, 3–30.CrossRefGoogle Scholar
  5. Arya, A., Sunder, S., & Glover, J. C. (1998). Earnings management and the revelation principle. Review of Accounting Studies, 3, 7–34.CrossRefGoogle Scholar
  6. Bamber, L. S., & Cheon, Y. S. (1998). Discretionary management earnings forecasts: Antecedents and outcomes associated with forecast venue and forecast specificity choices. Journal of Accounting Research, 36, 167–190.CrossRefGoogle Scholar
  7. Banker, R., Huang, R., & Natarajan, R. (2006). Does SG&A expenditure create a long-lived asset? Working paper (,%20Huang%20and%20Natarajan.pdf). Temple University, Baruch College, and The University of Texas at Dallas.
  8. Barclay, M. J., Smith, C. W., Jr., & Morellec, E. (2006). On the debt capacity of growth options. Journal of Business, 79, 37–59.CrossRefGoogle Scholar
  9. Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future cash flows. The Accounting Review, 76, 27–57.CrossRefGoogle Scholar
  10. Bartov, E., Givoly, D., & Hayn, C. (2002). The rewards to meeting or beating earnings expectations. Journal of Accounting and Economics, 33, 173–204.CrossRefGoogle Scholar
  11. Beidleman, C. (1973). Income smoothing: The role of management. The Accounting Review, 48, 653–667.Google Scholar
  12. Berger, P. G., & Hann, R. (2007). Segment profitability and the proprietary and agency costs of disclosure. Working Paper ( University of Chicago and University of Southern California.
  13. Bhattacharya, N., Black, E. L., Christensen, T. E., & Larson, C. R. (2003). Assessing the relative informativeness and performance of pro forma earnings and GAAP operating earnings. Journal of Accounting and Economics, 36, 285–319.CrossRefGoogle Scholar
  14. Botosan, C. A. (1997). Disclosure level and the cost of equity capital. The Accounting Review, 72, 323–349.Google Scholar
  15. Botosan, C. A., & Harris, M. S. (2000). Motivations for a change in disclosure frequency and its consequences: An examination of voluntary quarterly segment disclosures. Journal of Accounting Research, 38, 329–353.CrossRefGoogle Scholar
  16. Botosan, C. A., & Plumlee, M. A. (2002). A re-examiniation of disclosure level and the expected cost of equity capital. Journal of Accounting Research, 40, 21–40.CrossRefGoogle Scholar
  17. Bowen, R. M., Davis, A. K., & Matsumoto, D. A. (2005). Emphasis on pro forma versus GAAP earnings in quarterly press releases: Determinants, sec intervention, and market reactions. The Accounting Review, 80, 1011–1038.CrossRefGoogle Scholar
  18. Brown, L. D., & Caylor, C. L. (2005). A temporal analysis of quarterly earnings thresholds: Propensities and valuation consequences. The Accounting Review, 80, 423–440.CrossRefGoogle Scholar
  19. Bublitz, B., & Ettredge, M. (1989). The information in discretionary outlays: Advertising, research and development. The Accounting Review, 64, 108–124.Google Scholar
  20. Burgstahler, D. C., & Eames, M. (2006). Management of earnings and analysts’ forecasts to achieve zero and small positive earnings surprises. Journal of Business Finance & Accounting, 33, 633–652.CrossRefGoogle Scholar
  21. Bushee, B. J., Matsumoto, D. A., & Miller, G. S. (2003). Open versus closed conference calls: The determinants and effects of broadening access to disclosure. Journal of Accounting and Economics, 34, 149–180.CrossRefGoogle Scholar
  22. Bushee, B. J., & Noe, C. F. (2000). Corporate disclosure practices, institutional investors, and stock return volatility. Journal of Accounting Research, 38(Supplement), 171–202.CrossRefGoogle Scholar
  23. Bushman, R. M., Piotroski, J. D., & Smith, A. J. (2004). What determines corporate transparency? Journal of Accounting Research, 42, 207–252.CrossRefGoogle Scholar
  24. Cattell, R. B., & Vogelman, S. (1977). A comprehensive trial of the Scree and KG criteria for determining the number of factors. Multivariate Behavioral Research, 12, 289–325.CrossRefGoogle Scholar
  25. Chen, S., DeFond, M. L., & Park, C. W. (2002). Voluntary disclosure of balance sheet information in quarterly earnings announcements. Journal of Accounting and Economics, 33, 229–251.CrossRefGoogle Scholar
  26. Clarkson, P. M., Kao, J. L., & Richardson, G. D. (1994). The voluntary inclusion of forecasts in the MD&A section of annual reports. Contemporary Accounting Research, 11, 423–450.Google Scholar
  27. Collins, D. W., & Hribar, P. (2002). Errors in estimating accruals: Implications for empirical research. Journal of Accounting Research, 40, 105–134.CrossRefGoogle Scholar
  28. Collins, D. W., Maydew, E. L., & Weiss, I. S. (1997). Changes in the value relevance of earnings and book values over the past forty years. Journal of Accounting and Economics, 24, 39–67.CrossRefGoogle Scholar
  29. Cotter, J., Tuna, I., & Wysocki, P. D. (2006). Expectations management and beatable targets: How do analysts react to explicit earnings guidance? Contemporary Accounting Research, 23, 593–624.CrossRefGoogle Scholar
  30. Daniel, K., Hirshleifer, D., & Teoh, S. H. (2002). Investor psychology in capital markets: Evidence and policy implications. Journal of Monetary Economics, 49, 139–209.CrossRefGoogle Scholar
  31. Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18, 3–42.CrossRefGoogle Scholar
  32. Dechow, P. M., Kothari, S. P., & Watts, R. L. (1998). The relation between earnings and cash flows. Journal of Accounting and Economics, 25, 133–168.CrossRefGoogle Scholar
  33. DeFond, M. L., & Hung, M. (2003). An empirical analysis of analysts’ cash flow forecasts. Journal of Accounting and Economics, 35, 73–100.CrossRefGoogle Scholar
  34. DeFond, M. L., & Park, C. W. (1997). Smoothing income in anticipation of future earnings. Journal of Accounting and Economics, 23, 115–139.CrossRefGoogle Scholar
  35. Degeorge, F., Patel, J., & Zeckhauser, R. (1999). Earnings management to exceed thresholds. Journal of Business, 72, 1–33.CrossRefGoogle Scholar
  36. Demski, J. S. (1998). Performance measure manipulation. Contemporary Accounting Research, 15, 261–285.CrossRefGoogle Scholar
  37. Diamond, D. W. (1985). Optimal release of information by firms. Journal of Finance, 40, 1071–1094.CrossRefGoogle Scholar
  38. Doyle, J. T., Lundholm, R. J., & Soliman, M. T. (2003). The predicted value of expenses excluded from pro forma earnings. Review of Accounting Studies, 8, 145–174.CrossRefGoogle Scholar
  39. Doyle, J. T., & Soliman, M. T. (2002). Do managers use pro forma earnings to exceed analyst forecasts? Working Paper ( Utah State University and University of Washington.
  40. Dye, R. (1985). Disclosure of nonproprietary information. Journal of Accounting Research, 23, 123–145.CrossRefGoogle Scholar
  41. Dye, R. (2001). Commentary on essays on disclosure. Journal of Accounting and Economics, 32, 181–235.CrossRefGoogle Scholar
  42. Field, L., Lowry, M., & Shu, S. (2005). Does disclosure deter or trigger litigation? Journal of Accounting and Economics, 39, 487–507.CrossRefGoogle Scholar
  43. Francis, J., LaFond, R., Olsson, P. M., & Schipper, K. (2004). Cost of equity and earnings attributes. The Accounting Review, 79, 967–1010.CrossRefGoogle Scholar
  44. Francis, J., Philbrick, D., & Schipper, K. (1994). Shareholder litigation and corporate disclosures. Journal of Accounting Research, 32, 137–164.CrossRefGoogle Scholar
  45. Francis, J., & Schipper, K. (1999). Have financial statements lost their relevance? Journal of Accounting Research, 37, 319–352.CrossRefGoogle Scholar
  46. Francis, J., Schipper, K., & Vincent, L. (2002). Expanded disclosures and the increased usefulness of earnings announcement. The Accounting Review, 77, 515–546.CrossRefGoogle Scholar
  47. Francis, J., Schipper, K., & Vincent, L. (2003). The relative and incremental explanatory power of earnings and alternative (to earnings) performance measures for returns. Contemporary Accounting Research, 20, 121–164.CrossRefGoogle Scholar
  48. Frankel, R., Johnson, M., & Skinner, D. (1999). An Empirical examination of conference calls as a voluntary disclosure medium. Journal of Accounting Research, 37, 133–150.CrossRefGoogle Scholar
  49. Frankel, R., McNichols, M., & Wilson, P. (1995). Discretionary disclosure and external financing. The Accounting Review, 70, 133–150.Google Scholar
  50. Fudenberg, K., & Tirole, J. (1995). A theory of income and dividend smoothing based on incumbency rents. Journal of Political Economy, 103, 75–93.CrossRefGoogle Scholar
  51. Gelb, D. (2002). Intangible assets and firms’ disclosures: An empirical investigation. Journal of Business Finance & Accounting, 29, 457–476.CrossRefGoogle Scholar
  52. Gradient Analytics, Inc. (2005). Earnings quality analytics: The earnings quality factor model. White paper.
  53. Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40, 3–73.CrossRefGoogle Scholar
  54. Hayn, C. (1995). The information content of losses. Journal of Accounting and Economics, 20, 125–153.CrossRefGoogle Scholar
  55. Healy, P. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7, 85–107.CrossRefGoogle Scholar
  56. Healy, P. M., Hutton, A. P., & Palepu, K. G. (1999). Stock performance and intermediation changes surrounding sustained increases in disclosure. Contemporary Accounting Research, 16, 485–520.Google Scholar
  57. Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31, 405–440.CrossRefGoogle Scholar
  58. Heitzman, S., Wasley, C. E., & Zimmerman, J. L. (2008). The joint effects of materiality thresholds and voluntary disclosure incentives on firms’ disclosure decisions. Working paper ( University of Rochester.
  59. Hirschey, M. (1982). Intangible capital aspects of advertising and R&D expenditures. The Journal of Industrial Economics, 30, 375–389.CrossRefGoogle Scholar
  60. Hirshleifer, D., Lim, S. S., & Teoh, S. H. (2007). Driven to distraction: Extraneous events and underreaction to earnings news. Working paper ( University of California at Irvine and DePaul University.
  61. Hirshleifer, D., & Teoh, S. H. (2003). Limited attention, information disclosure, and financial reporting. Journal of Accounting and Economics, 36, 337–386.CrossRefGoogle Scholar
  62. Ho, T., & Michaely, R. (1988). Information quality and market efficiency. Journal of Financial and Quantitative Analysis, 23, 53–70.CrossRefGoogle Scholar
  63. Hoskin, R. E., Hughes, J. S., & Ricks, W. E. (1986). Evidence on the incremental information content of additional firm disclosures made concurrently with earnings. Journal of Accounting Research, 24(Supplement), 1–32.CrossRefGoogle Scholar
  64. Huberman, G., & Regev, T. (2001). Contagious speculation and a cure for Cancer: A nonevent that made stock prices soar. Journal of Finance, 56, 387–396.CrossRefGoogle Scholar
  65. Johnson, M. F., Kasznik, R., & Nelson, K. K. (2001). The impact of securities litigation reform on the disclosure of forward-looking information by high technology firms. Journal of Accounting Research, 39, 297–327.CrossRefGoogle Scholar
  66. Joos, P., & Plesko, G. A. (2005). Valuing loss firms. The Accounting Review, 80, 847–870.CrossRefGoogle Scholar
  67. Jung, W., & Kwon, Y. K. (1988). Disclosure when the market is unsure of information endowment of managers. Journal of Accounting Research, 26, 146–153.CrossRefGoogle Scholar
  68. Kasznik, R., & Lev, B. (1995). To warn or not to warn: Management disclosures in the face of an earnings surprise. The Accounting Review, 70, 113–134.Google Scholar
  69. Kim, J., & Mueller, C. W. (1978). Introduction to factor analysis: What it is and how to do it. Sage: University Paper Series on Quantitative Applications in the Social Sciences.Google Scholar
  70. Kim, O., & Verrecchia, R. E. (2001). The relation among disclosure, returns, and trading volume information. The Accounting Review, 76, 633–654.CrossRefGoogle Scholar
  71. Kirschenheiter, M., & Melumad, N. D. (2002). Can “big bath” and earnings smoothing co-exist as equilibrium financial reporting strategies? Journal of Accounting Research, 40, 761–796.CrossRefGoogle Scholar
  72. Klibanoff, P., Lamont, O., & Wizman, T. A. (1998). Investor reaction to salient news in closed-end country funds. Journal of Finance, 53, 673–699.CrossRefGoogle Scholar
  73. Kothari, S. P., Shu, S., & Wysocki, P. (2008). Do managers withhold bad news? Working Paper ( MIT Sloan School of Management.
  74. Lang, M., & Lundholm, R. (1993). Cross-sectional determinants of analyst ratings of corporate disclosures. Journal of Accounting Research, 31, 246–271.CrossRefGoogle Scholar
  75. Lev, B., & Sougiannis, T. (1996). The capitalization, amortization, and value-relevance of R&D. Journal of Accounting and Economics, 21, 107–138.CrossRefGoogle Scholar
  76. Lougee, B. A., & Marquardt, C. A. (2004). Earnings informativeness and strategic disclosure: An empirical examination of “pro forma” earnings. The Accounting Review, 79, 769–795.CrossRefGoogle Scholar
  77. Louis, H., Robinson, D., & Sbaraglia, A. (2008). An integrated analysis of the association between accrual disclosure and the abnormal accrual anomaly. Review of Accounting Studies, 13, 23–54.CrossRefGoogle Scholar
  78. Papke, L. E., & Wooldridge, J. M. (1996). Econometric methods for fractional response variables with an application to 401(K) plan participation rates. Journal of Applied Econometrics, 11, 619–632.CrossRefGoogle Scholar
  79. Pastena, V., & Ronen, J. (1979). Some hypotheses on the pattern of management’s informal disclosures. Journal of Accounting Research, 17, 550–564.CrossRefGoogle Scholar
  80. Sankar, M., & Subramanyam, K. (2001). Reporting discretion and private information communication through earnings. Journal of Accounting Research, 39, 367–392.CrossRefGoogle Scholar
  81. Scott, T. W. (1994). Incentives and disincentives for financial disclosure: Voluntary disclosure of defined benefit pension plan information by Canadian firms. The Accounting Review, 69, 26–43.Google Scholar
  82. Skinner, D. J. (1994). Why Firms voluntarily disclose bad news. Journal of Accounting Research, 32, 38–60.CrossRefGoogle Scholar
  83. Skinner, D. J. (1997). Earnings disclosures and stockholder lawsuits. Journal of Accounting and Economics, 23, 249–282.CrossRefGoogle Scholar
  84. Soffer, L. E., Thiagarajan, S. R., & Walther, B. R. (2000). Earnings preannouncement strategies. Review of Accounting Studies, 5, 5–26.CrossRefGoogle Scholar
  85. Stice, E. (1991). The market reaction to 10-K and 10-Q filings and to subsequent The Wall Street Journal earnings announcements. The Accounting Review, 66, 42–55.Google Scholar
  86. Suozzo, P., Cooper, S., Sutherland, G., & Deng, Z. (2001). Valuation multiples: A primer. UBS Warburg: Valuation and Accounting (November).Google Scholar
  87. Tucker, J. W., & Zarowin, P. A. (2006). Does income smoothing improve earnings informativeness? The Accounting Review, 81, 251–270.CrossRefGoogle Scholar
  88. Verrecchia, R. E. (1983). Discretionary disclosure. Journal of Accounting and Economics, 5, 179–194.CrossRefGoogle Scholar
  89. Verricchia, R. E. (2001). Essays on disclosure. Journal of Accounting and Economics, 32, 97–180.CrossRefGoogle Scholar
  90. Wasley, C. E., & Wu, J. S. (2006). Why do managers voluntarily issue cash flow forecasts? Journal of Accounting Research, 44, 389–429.CrossRefGoogle Scholar
  91. You, H., & Zhang, X. (2007). Investor under-reaction to earnings announcement and 10-K report. Working paper ( Barclays Global Investors and University of California, Berkeley.
  92. Yu, F. (2008). Analyst coverage and earnings management. Journal of Financial Economics, 88, 245–271.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.S.C. Johnson Graduate School of ManagementCornell UniversityIthacaUSA
  2. 2.Eli Broad College of BusinessMichigan State UniversityEast LansingUSA
  3. 3.School of ManagementGeorge Mason UniversityFairfaxUSA

Personalised recommendations