Audited Financial Reporting and Voluntary Disclosure as Complements: A Test of the Confirmation Hypothesis
71 Pages Posted: 17 Jun 2010 Last revised: 11 Nov 2011
Date Written: June 30, 2011
We examine the “confirmation” hypothesis, that audited, backward-looking financial outcomes and disclosure of managers’ private forward-looking information are complements, because independent audit disciplines and hence enhances disclosure credibility. Committing to higher audit fees (a measure of the extent of financial outcome verification and thus the accuracy and freedom from manipulation of reported outcomes), is associated with management forecasts that are more frequent, specific, timely and accurate, and receive a larger market reaction. These relations are not driven by litigation risk and are robust to various tests. Private information disclosure and audited financial reporting are complements and cannot be evaluated separately.
Suggested Citation: Suggested Citation