Voluntary disclosure of press releases and the importance of timing: a comparative study of the UK and Spain.

VerfasserGuillamon-Saorin, Encarna
PostenRESEARCH ARTICLE

Abstract This paper investigates the effect of proprietary costs in relation to managers' decisions to disclose information. Further, we look into the impact of factors affecting the timing of disclosures in a comparative study of Spain and the UK. Our investigation focuses on management earnings press releases discussing annual results. These press releases allow managers great discretion in terms of the decision to release and the timing. Our results show that the potential for growth is negatively related to the likelihood of a company voluntarily issuing a press release. Moreover, once the decision to voluntarily disclose is made, the timing is also relevant. We find significant differences in the timing of press releases between the two countries examined in this study. Also, significant differences between companies having or not having an investor relations department are evident. The existence of an investor relations function in the company seems to have a different impact depending on the country. Interestingly, even though corporate performance seems not to have a direct effect on the timing of the press release, this factor is moderated by the country where companies operate.

Keywords Voluntary disclosure * Press releases * Timing * Investor relations department * Spain * UK

1 Introduction

The globalization of capital markets and the increase in foreign investors have brought pressure on companies to provide greater value to shareholders prompting standards setters to make changes in regulation toward harmonisation and international standards (Moden and Oxelheim 1997; Strange et al. 2009). Differences in disclosure practices may jeopardise the harmonisation process because international investors may not be able to reliably compare information issued by companies in different countries (Aihashim 1982). To address these issues, we investigate whether proprietary information costs influence the decision to issue a press release and include a number of control factors which have been found to have an effect on the disclosure of press releases in prior literature (Guillamon-Saorin and Sousa 2010). Specifically, we investigate the circumstance in which managers have made the decision to issue a press release and concentrate on the determinants of timing and whether there are differences across the countries included in this study (Spain and the UK).

Most firms have no formal policies for voluntary disclosure. Thus, the level of disclosure for a company is determined by its costs and benefits. Managers have discretion to decide on the nature, content, venue and timing of voluntary disclosure and the incentives they have to disclose or not will drive the final decision. Voluntary information points to different managerial attitudes related to this discretion. We examine growth opportunities as an indicator of proprietary information which has been widely used and accepted in prior literature (Bamber and Cheon 1998; Clarkson et al. 1994). Growth opportunities are a sign of availability of profitable investments which are attractive for competitors or new investors. The possibility of growth opportunities may drive managers to withhold information to deter potential competitors from entering the market. However, sometimes managers have no choice in relation to disclosure because no news could be interpreted as bad news (Francis et al. 2008; Verrecchia 1990). Once the decision to release has been made, managers have to decide on when to release the information. Management discretion related to timing may have high potential for strategic behaviour. For example, managers could decide to disclose the good news quickly and delay the bad news (Sengupta 2004).

Timing is an important quality of financial information (Financial Accounting Standards Board 1980). The International Accounting Standards Board (IASB) has recently discussed the importance of timeliness, which was initially considered as part of relevance (1) (IASB 2008). After further discussion and deliberation, the IASB concluded that information reported in a timely manner can positively affect relevance as well as the faithful representation of that information, and therefore needs to be considered as one of the enhancing qualitative characteristics of financial information that should be maximized to the extent possible (IASB 2008). In particular, the IASB states that timeliness means having information available to decision makers before it loses its capacity to influence decisions. Having relevant information available sooner can enhance its capacity to influence decisions, and a lack of timeliness can deprive information of its potential usefulness.

Prior literature argues that timeliness is a key determinant in making the content of a document more effective in directing attention and that it is even capable of changing impressions (Daft and Lengel 1986). Therefore, an important factor to be considered by companies when deciding the date on which to voluntarily disclose information should be the potential benefits and costs of releasing quickly. Prior work investigates the timing of corporate disclosures using earnings announcements and earnings forecast errors to classify earnings announcements into good, bad or neutral news (e.g., Begley and Fischer 1998; Givoly and Palmon 1982; Kross 1981; Kross and Schroeder 1984). We investigate a particular type of earnings announcement, Annual Results Press Releases (hereafter ARPRs), which are issued to the market soon after the accounts are closed. As a result, they usually reach their audience before the annual report is released, thereby providing stakeholders with a summary of the financial results of the company in a timely manner.

In this study, we focus on Spanish and UK publicly traded companies and their decision to issue and the timing of ARPRs. Attempts related to timeliness regulation have been primarily confined to periodic reporting (e.g., interim or quarterly reports) in many countries. There are no explicit rules or guidance within the UK/ Spanish Stock Exchange regulations regarding press releases because these are voluntary disclosures. However, there is a requirement (as specified in rules 9.1 and 9.2 of The Listing Rules of the London Stock Exchange in the UK and article 82 of the Law 24/1988 of 28 July of the Stock Exchange in Spain) that a company must inform a regulatory information service without delay of any price-sensitive information that is not public knowledge. Therefore, listed companies should not announce anything in a press release that may be considered price-sensitive unless it has already been announced via the regulatory news service.

We investigate Spain and the UK because these contexts represent extreme examples of the two main accounting philosophies: the continental system, represented by Spain, which is characterized by debt-oriented companies, and the code law system and the Anglo-Saxon philosophy, which is market-oriented and characterized by common law (La Porta et al. 1997). In addition, Spain represents the less transparent and more conservative set of countries while the UK represents the more transparent and optimistic set (Gray 1988). The opposing characteristics of the UK and Spain provide a good context in which to test a number of new dimensions alongside previously tested variables.

Thus, this study contributes to the literature in the following ways. Firstly, we add to the literature on voluntary disclosure by investigating documents (ARPRs) which have not been widely explored in prior research. (2) The current paper presents evidence of the relevance of proprietary costs on the management decision to issue an ARPR.

Secondly, our work adds to the current debate on the differences in disclosure practices among countries and the progress needed toward harmonization (e.g., Kolk 2005). In this context, there has been a vigorous debate as to whether and how a firm's home-country legal system still plays a role in determining company disclosure strategies (Leuz et al. 2003; Shi et al. 2012). The growth in international transactions has obliged business to pay greater attention to international differences in information reporting and disclosure practices (Alhashim 1982; Shi et al. 2012). The internationalization of markets and the importance of international investment make studies comparing reporting practices in different countries relevant and valuable. Our hypotheses are tested in a cross-national context, using Spain and the UK. We demonstrate that country characteristics still matter in today's global business environment.

Thirdly, we investigate whether firms facing higher agency costs provide more timely information. Agency theory underpins the need to reduce information asymmetries between managers and owners of publicly listed companies. In agency theory, information is considered a commodity which implies issuing costs. This gives special relevance to corporate information systems monitoring management behavior. A more efficient management monitoring can be achieved by the request of more information and more timely disclosures. Managers have the choice to delay or pre-empt the disclosure of ARPRs and this makes them an interesting venue through which to investigate the choice in timing. To our knowledge, this is the first study investigating the timing of this type of disclosure.

In particular, we examine the effect of country, the existence of an investor relations department and corporate performance on timing of disclosure. Agency theory would suggest that these variables affect disclosure and transparency which is one of the main management monitoring devices proposed by agency theory (Eisenhardt 1989). We further analyze the moderating effect of the national context in which these disclosures happen. The cross-variable effects of these variables in voluntary disclosure have not been previously analyzed. Lastly, the...

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