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Enhanced business reporting: value relevance and determinants of valuation-related disclosures

26 citations0/0 files storedJournal of Intellectual Capital

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Financial Reporting and Valuation Research Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting

Abstract

Purpose Enhanced business reporting (EBR) seeks to address the information needs of investors when making company valuations for investment decisions. The purpose of this paper is to analyze the relevance for market valuation of EBR disclosures that are directly related to firm valuation (value-based reporting (VBR)). Design/methodology/approach Data are hand collected from annual reports of German publicly listed companies over five years. The content analysis is based on the valuation-related disclosure framework of the German Schmalenbach Society of Business Administration. A 2SLS approach accounts for potential endogeneity. Findings Share-based compensation, leverage, corporate size, and share volatility are significant determinants of VBR. The level of VBR is significantly associated with market values and provides additional market value explanatory power, indicating its relevance to investors in the process of valuation and decision making. Also, the relevance of book value and earnings for explaining market values increases for firms with better VBR. The findings are robust to the exclusion of banks and assurance companies and to alternative model and variable specifications. Research limitations/implications The research contributes to the literature on voluntary disclosures by testing an EBR framework explicitly derived from valuation theory. The results provide indirect evidence of the investors’ use of respective valuation techniques in decision making. A contribution is made to the value relevance literature by showing that valuation-related disclosures constitute a suitable proxy for “other information” in the Ohlson’s (1995) model. Such disclosures complement traditional accounting metrics, i.e. book value and earnings, as basis for valuations. Potential caveats relate to the content analysis of annual reports and the endogeneity of voluntary disclosures. Originality/value This paper informs the debate on further developments of EBR in helping to identify important components thereof.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1951Coefficient Alpha and the Internal Structure of Tests 1970The Market for "Lemons": Quality Uncertainty and the Market Mechanism 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 1995Earnings, Book Values, and Dividends in Equity Valuation*2001Does Doing Good Always Lead to Doing Better? Consumer Reactions to Corporate Social Responsibility 2010Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting 1997Disclosure level and the cost of equity capital.

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