Mandatory Disclosure and Managerial Discretion: Evidence from SFAS132R

• In Event: Managerial discretion in financial reporting
  In Paper Session: Managerial Discretion in Financial Reporting

Abstract

I use the implementation of FASB Statement No. 132R (“SFAS132R”) to examine whether and how mandatory disclosure affects managerial discretion. SFAS132R mandated additional disclosures for two of the three critical pension assumptions without any changes in the recognition requirements for pension plans. I find that firms reduced the use of discretion in the assumptions subject to additional mandatory disclosure requirements. Both the mean and the dispersion of the distribution of discretion were affected. In contrast, I find that firms increased the use of discretion in the assumption unaffected by SFAS132R. I also find evidence of a substitution effect, where firms shifted their use of discretion from those assumptions subject to increased mandatory disclosure to the assumption where no new disclosures were introduced. Additional tests suggest that the documented changes are attributable to mandatory disclosure requirements rather than SEC oversight or any broad change in the regulatory environment.

Author

• James Patrick Naughton, Northwestern University