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Review of Quantitative Finance and Accounting

, Volume 44, Issue 3, pp 445–471 | Cite as

Effect of information disclosure and transparency ranking system on mispricing of accruals of Taiwanese firms

  • Hsien-Li Lee
  • Hua Lee
Original Research

Abstract

This paper examines whether disclosure transparency, as measured by the rankings of “Information Disclosure and Transparency Ranking System” (IDTRS) constructed by Taiwan Securities and Futures Commission in 2003, reduces accrual anomaly and is useful particularly for sophisticated investors in valuing stocks using accruals. The preliminary results indicate that firms with high rankings show a limited reduction in overpricing of accruals and cash flow and lower abnormal returns, relative to firms with low rankings in disclosure transparency. Given more disclosure, firms with more sophisticated institutional shareholders exhibit significantly lower mispricing of accruals and future abnormal returns. However, after controlling for confounding factors influencing stock returns, we find no evidence that accruals predict abnormal returns. Taken together, the findings suggest that IDTRS is useful in reducing mispricing of accruals for sophisticated investors, but the disclosure effect of the IDTRS may not be considerable enough to exhibit substantial benefit from disclosure on mitigating the mispricing of accruals. The evidence provides policy implications to the regulatory authority in developing a mechanism to lessen the information asymmetry problem.

Keywords

Accrual anomaly Accrual mispricing Investor sophistication 

JEL Classification

M41 G10 G11 

Notes

Acknowledgments

Correspondence: Hua Lee. The authors are grateful for the editor and the anonymous reviewer for their valuable comments. The comments from the reviewers, discussants, and participants at 2012 American Accounting Association Annual Meeting in Washington, D.C. and 2011 Accounting Theory and Practice Conference in Taipei, Taiwan, are appreciated. Hsien-Li Lee thanks the Conference Grant from National Science Council, Taiwan (No. 101-2914-I-033-013-A1).

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Department of AccountingChung Yuan Christian UniversityChung LiTaiwan
  2. 2.Department of AccountingHong Kong Shue Yan UniversityNorth PointHong Kong

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