Regulating the Timing of Disclosure

The following post comes to us from Lisa Bryant-Kutcher of the Department of Accounting at Colorado State University, Emma Peng of the Accounting Area at Fordham, and David Weber of the Department of Accounting at the University of Connecticut.

In our paper, Regulating the Timing of Disclosure: Insights from the Acceleration of 10-K Filing Deadlines, forthcoming in the Journal of Accounting and Public Policy, we examine how regulatory reforms that accelerate 10-K filing deadlines in 2003 affect the reliability of accounting information. The intended purpose of the new deadlines is to improve the efficiency of capital markets by making accounting information available to market participants more quickly. However, accelerating filing deadlines compresses the time available for firms and their auditors to prepare, review, and audit accounting reports, suggesting potential costs in the form of increased misstatements and lower reliability. We provide empirical evidence on the effects of accelerating deadlines by comparing the likelihood of restatement of 10-K filings before and after the rule change.

We find that restatements increase after the acceleration of filing deadlines. In particular, we find that firms that are forced to file more quickly than they had historically are more likely to subsequently restate their filings. This result does not hold for firms whose filing practices were unaffected by the regulatory change, suggesting that it is unlikely to simply reflect other, time period-specific factors unrelated to the filing deadlines. This result also holds for restatements due to both unintentional and intentional misstatements. Further, the increase in restatements is particularly acute for firms whose audits were likely to face significant time pressure, which is consistent with audit-related constraints playing an important role in firms’ abilities to meet accelerated deadlines without compromising quality.

Taken together, the results from this study contribute to our understanding of the effects of regulating the timing of disclosures. Most importantly, by documenting an association between accelerated filing deadlines and an increase in restatements for the firms most affected by those new deadlines, our results highlight a cost of forcing firms to provide timelier disclosure of accounting reports.

Our results should be interpreted in light of the time period studied and the fact that they are based on a quasi-experiment. Thus, we cannot completely rule out the possibility that they are attributable to some other concurrent factor. This concern, while not eliminated, is mitigated by our use of a difference-in-differences research design and the fact that the results are robust to a battery of sensitivity tests, including dropping firms with auditor switches or internal control weaknesses and the use of propensity score matching. We also note that this study addresses only one possible cost of the deadline acceleration and we do not examine potential benefits. Thus, we refrain from any direct policy recommendations. We do, however, provide evidence on the most significant cost alleged during the debates that preceded the regulation and thus our results should be useful in informing future policy discussions.

The full paper is available for download here.

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