Does disclosure transparency matter for mispricing of accruals?

Abstract

This paper examines whether disclosure transparency helps to reduce the accrual anomaly. Using the ratings of “Information Disclosure and Transparency Rankings System” (IDTRS), constructed by the Taiwan Securities and Futures Commission, as a proxy for disclosure transparency, the results indicate that firms with high ratings show a limited reduction in overpricing of accruals and cash flow and in predictability of abnormal returns, relative to firms with low ratings. Moreover, after controlling for confounding factors influencing future returns, we find no evidence that accruals predict abnormal returns for low-rating firms. Taken together, the evidence suggests that the disclosure effect of the IDTRS may not be considerable enough to exhibit substantial benefit from disclosure on mitigating the mispricing of accruals. This paper provides policy implications to the regulatory authority in developing a mechanism to lessen the information asymmetry problem.