Academic journal article Journal of Business and Accounting

The Impact of the Timeliness of Earnings Releases in the U.S. versus European Nations

Academic journal article Journal of Business and Accounting

The Impact of the Timeliness of Earnings Releases in the U.S. versus European Nations

Article excerpt

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INTRODUCTION

An efficient and effective capital market needs a transparent financial reporting system to increase investors' confidence in making investment decisions. Financial information should be of high quality before being delivered to stakeholders because the users of financial information demand complete, transparent and timely information.

In the United States, the U.S. Securities and exchange Commission requires that public corporations file financial statements within 90 days after their fiscal year end (SEC Sections 13 and 15d). Many authors have indicated that the timeliness and value-relevance of financial reporting may be influenced by the nature of the legal systems in various countries. Joos and Lang (1994) define a "Continental Model" which is indicative of nations on the European continent. The emphasis of this model is on the debtholder as opposed to stockholder, due to the large extent of massive debt holdings by banks on the European continent. Because of this, the timeliness of earnings disclosures is not as important since the equity holder seems not to be the primary beneficiary. The "Anglo-Saxon Model" is seen primarily in the U.K. and focuses on equity holders. Ball, Kothari and Robin (2000) find that in the U.K. countries there is less demand for public disclosure on a timely basis since stakeholders such as unions, banks, and other groups have a close relationship with firms and therefore a strict release date of financial information is not as crucial.

Still another aspect of the timeliness of earnings releases is the pertinence of prevailing economic conditions. Anilowski, Feng and Skinner (2010) argue that timeliness of earnings reports is crucial during periods of economic contraction and can be beneficial to stakeholders in making equity decisions.

This study attempts to tie together previous studies which have evaluated timeliness of earnings releases. In doing so, and analysis will be made comparing earnings releases of firms in the U.S. to those in Continental Europe and the U.K. While it has been shown that not all European firms follow similar guidelines, all publicly traded U.S. firms follow Generally Accepted Accounting Principles (GAAP), therefore, there is potential for significant disclosure differences among nations. In addition, this study will span both periods of economic expansion and economic contraction in order to assess whether or not economic conditions play a role in the timeliness of financial disclosures and how the economy might play a role in the subsequent price of securities.

LITERATURE REVIEW

Watts and Zimmerman (1986) posit that the timely dissemination of quality financial information is an objective of minimizing agency costs and the costs incurred by the political visibility of the firm. Therefore, following this theory, it could be construed that firms which are at low risk, generally contain little to no social or political pressure, and are in lock-step with their investors, do not have the same constraints in publishing timely financial information.

Other studies have stressed the distinctions between countries. Ali and Hwang (2000) find that the UK model emphasizes tax rules and accounting standards and as such, more time is spent adhering to rules and standards and less time to timely financial disclosures. Joliet and Muller (2009) find that there are significant differences between U.K. and Continental Europe when it comes to the correlation between earnings disclosures and stock prices. Garcia, Oma, and Mora (2005) indicate that U.K. investors respond differently to bad news earnings releases than do Continental European firms. Investors in Continental Europe have a greater downward response to bad news earnings reports since there exists less emphasis on the equity holder in those countries, and U.K. firms have a much closer tie to their stakeholders. On top of all of this, Leuz, Nanda and Wysocki (2003) find that earnings management may vary widely by country. …

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