The Monitoring Effect of More Frequent Disclosure

• In Event: Social and Monitoring Roles of Disclosure

Abstract

This paper examines the role of higher reporting frequency in monitoring managers from a shareholder perspective. While previous literature focuses on the monitoring effects of disclosure quantity and quality, we investigate the effect of disclosure frequency and thus the timeliness of information. For our analyses, we use a quasi-experiment in the European Union (EU) in which reporting frequency requirements differed across and within countries before being harmonized by a directive requiring the implementation of quarterly disclosure. We investigate how both cross-sectional differences in reporting frequency and their harmonization affect shareholders’ ability to monitor managers. To gauge monitoring effects, we use shareholders’ valuation of cash assets. We find that semi-annual reporters exhibit lower cash valuation than quarterly reporters. Using a difference-in-differences approach, we show that these differences recede after the implementation of higher reporting frequency by semi-annual reporters. Our results are consistent with the notion that more frequent disclosure reduces agency conflicts by providing shareholders with the opportunity for timelier monitoring to constrain managers from expropriating corporate resources. In additional analyses, we find that this monitoring effect is relevant when corporate governance or earnings attributes are weak, the risk of inefficient resource allocation is high, or the need for frequent disclosure is strong.

Authors

• Benedikt Downar, Technische Universitaet Muenchen

• Juergen Ernstberger, Technische Universitaet Muenchen

• Benedikt Link, Neue Masche