The relation between earnings performance and discretionary corporate disclosure is an important question in the accounting literature. However, our understanding of this issue is still limited. I examine the effect of earnings performance and related factors on the price sensitive disclosures issued by publicly listed companies and on the release of Queries by the Australian Stock Exchange (ASX) under the Australian continuous disclosure regime (CDR).
The first of the two main purposes of this study is to extend the literature on the association of earnings performance and discretionary disclosure. Prior research has mainly focussed on management earnings forecasts and found conflicting results. The Australian disclosure environment, with its unique combination of half-yearly reporting, low private litigation threats and statutory-backed continuous disclosure requirements that are primarily enforced through a central stock exchange and a regulatory body, provides an interesting opportunity for the study of disclosure behaviour.
My second purpose is to extend the limited research on the continuous disclosure practices under the CDR. Given the strong interest in the effectiveness of the CDR by the government, regulators and financial market participants, and given the latest legal reforms to improve compliance with the continuous disclosure rules, empirical evidence on companies' continuous disclosure practices should assist policy-makers, regulators and market participants to assess the effectiveness of the continuous disclosure system and the need for further legal reform.
Despite the lack of private shareholder litigation threats, I argue that natural capital market forces and regulatory attention are sufficient to create asymmetric costs for inadequate disclosure so that firms with negative earnings news are more likely to make continuous disclosure than firms with positive earnings news. On average, the results from multivariate regression analysis support this hypothesis for sample firms. In addition, loss-making firms are found to have a higher level of price sensitive disclosure than profit-making firms, suggesting the continuous disclosure regime imposes greater costs of non-disclosure on loss firms than profit firms. However, loss firms with earnings increases make more disclosures than loss firms with earnings declines. This finding may be explained by (a) loss firms with earnings increases have greater costs of nondisclosure, possibly due to the more lasting nature of their losses, and / or (b) loss firms with earnings declines have greater costs of disclosure, possibly due to the combination of bad news of an earnings loss and an earnings decline.
As the continuous disclosure rules only require 'material' information to be disclosed on a continuous basis, I also argue that the magnitude and permanence of earnings news, and the earnings-return correlation, are positively related to the materiality of earnings news and thus are positively associated with the level of price sensitive disclosure. As hypothesised, the results show that a larger change in earnings is generally associated with a higher level of price sensitive disclosure. However, there is no empirical support for the hypothesis on the permanence of earnings news. The earnings-return correlation is found to be positively associated with the level of price sensitive disclosure for firms with earnings increases but not for firms with earnings decreases, suggesting the greater likelihood of a positive share price impact creates incentives for higher correlation firms to disclose good news.
I also verify and extend the descriptive findings in Neagle and Tsykin (2001) by using multivariate methods and a longer and less atypical sample period to examine the determinants of the release of ASX Queries. Consistent with their findings, loss-making firms. Telecommunications firms and Miscellaneous Industrials firms are found to be more likely to receive ASX Queries. In general, loss firms are associated with a higher level of ASX Query-related price sensitive disclosure when they have negative earnings news, but not when they have positive earnings news. These results are consistent with the argument that although earnings losses and earnings declines place stronger pressure on management to make timely disclosures, the inherently higher costs of disclosure for such news also result in a higher incidence of non-compliance. The results also show that loss-making firms with earnings declines are more likely to receive ASX Queries relative to profit firms with earnings declines.
Contrary to the finding m Neagle and Tsykin (2001), I do not find firm size to be negatively related to the likelihood of receiving ASX Queries after controlling for other factors. A number of industries are identified by Neagle and Tsykin (2001) as having a higher risk of non-compliance, including the Media industry, the Investment & Financial Services industry and the Health & Biotechnology industry. However, I do not find these industries to have a higher level of ASX Queries. The size of earnings changes is found to be positively associated with the level of ASX Queries for bad news firms but not for good news firms.
Overall, the evidence shows firms with poor earnings performance such as earnings declines and earnings losses face greater costs of non-disclosure and greater regulatory attention (in terms of the level of ASX Queries) under the CDR. The findings also suggest different combinations of regulatory requirements and litigation environment can achieve similar disclosure outcomes. However, the specific continuous disclosure requirements in Australia also result in different disclosure outcomes compared to the US. The results observed m this study are consistent with the continuous disclosure regime having an impact on disclosure behaviour, but there is also evidence of strategic disclosure that is not consistent with strict compliance with the CDR. An important implication from this study's findings is that disclosure decisions vary depending on the situations / conditions faced by corporate managers. These conditions may be as simple as whether a firm has good news or bad news, and whether it is making a profit or a loss. Therefore, it may be misleading to generalise findings about disclosure behaviour without considering the specific conditions faced by managers when the disclosure decision is made. For example, an earnings loss has been shown in this study to be a major factor that affects corporate disclosure decisions.