In this paper, I investigate the determinants and consequences of disclosure committee adoption. I find that companies with material weaknesses in internal controls over financial reporting and less readable 10-K filings are more likely to adopt disclosure committees.
University of Arkansas, Fayetteville ScholarWorks@UARK Theses and Dissertations 7-2015 The Determinants and Consequences of Disclosure Committee Adoption Lyle Roy Schmardebeck University of Arkansas, Fayetteville Follow this and additional works at: http://scholarworks.uark.edu/etd Part of the Accounting Commons, Business Administration, Management, and Operations Commons, and the Corporate Finance Commons Recommended Citation Schmardebeck, Lyle Roy, "The Determinants and Consequences of Disclosure Committee Adoption" (2015) Theses and Dissertations 1188 http://scholarworks.uark.edu/etd/1188 This Dissertation is brought to you for free and open access by ScholarWorks@UARK It has been accepted for inclusion in Theses and Dissertations by an authorized administrator of ScholarWorks@UARK For more information, please contact scholar@uark.edu, ccmiddle@uark.edu The Determinants and Consequences of Disclosure Committee Adoption The Determinants and Consequences of Disclosure Committee Adoption A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Business Administration by Lyle Roy Schmardebeck Brigham Young University Bachelor of Science in Accounting, 2009 Brigham Young University Master of Accountancy, 2009 July 2015 University of Arkansas This dissertation is approved for recommendation to the Graduate Council _ Dr Linda A Myers Dissertation Director _ Dr Cory A Cassell Committee Member _ Dr Kangzhen Xie Committee Member _ Dr James N Myers Committee Member Abstract After the passage of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission recommended that companies voluntarily adopt disclosure committees to aid in preparing company disclosures In this paper, I investigate the determinants and consequences of disclosure committee adoption I find that companies with material weaknesses in internal controls over financial reporting and less readable 10-K filings are more likely to adopt disclosure committees In consequences analyses, using a propensity score matched control sample and a difference-in-differences research design, I find that 10-K filings are longer and less readable after disclosure committee adoption However, consistent with institutional theory, I not find evidence of a reduction in information asymmetry or an increase in the informativeness of earnings following disclosure committee adoption Acknowledgments I am grateful for the guidance and instruction of my dissertation chair, Linda Myers, and the members of my dissertation committee, Cory Cassell, James Myers, and Kenneth Xie I also thank Ben Anderson, T J Atwood, Cari Burke, Lauren Cunningham, Andrew Doucet, Taylor Joo, Stacey Kaden, Gary Peters, Michael Stuart, and seminar participants at the University of Arkansas, the University of Missouri, and the Miami Rookie Camp for providing helpful comments and suggestions I express gratitude to my family for their support and encouragement Finally, I express gratitude to my wife, Brenna, because I wouldn’t have been able to accomplish my goals without her love, friendship, and dedication Table of Contents I Introduction II Background, Prior Literature, and Hypothesis Development A Disclosure Committee B Annual Report Readability C Information Asymmetry .9 D Earnings Informativeness 10 III Research Design 12 A Determinants of Disclosure Committee Adoption .12 B Propensity Score Matching and Difference in Differences 15 C Readability Tests 16 D Information Asymmetry Tests .18 E Earnings Informativeness Tests 20 IV Sample Selection and Data 22 V Results 24 A Determinants Test and Propensity Score Matching .24 B Readability Tests 27 C Information Asymmetry Tests .29 D Earnings Informativeness Tests 29 VI Additional Analyses .30 A Specific Word Types 30 B Disclosure Committee Composition Tests 32 C Internal Control over Financial Reporting 35 VII Robustness Tests 36 A Timing of Disclosure Committee Adoption 36 B Measurement Window of Bid-Ask Spreads and Market Illiquidity 37 C Alternative Measure of Information Asymmetry 37 VIII Conclusion 38 IX References 41 X Appendix A: Sample Disclosure Committee Charter 46 XI Appendix B: Variable Definitions .48 List of Tables Disclosure Committee Sample Summary 52 Panel A: Disclosure Committee and Control Observations by Year 52 Panel B: Disclosure Committee and Control Observations by Fama and French (1997) Industry 53 Descriptive Statistics for Determinants Model 55 Determinants Model with Fama and French (1997) Industry Classification .56 Determinants Model with One Digit SIC Codes 57 Propensity Score Matching 58 Panel A: Sample Selection 58 Panel B: Covariate Balance 58 Difference in Governance Controls .59 Panel A: Before Adoption 59 Panel B: After Adoption 59 Difference in Differences Sample Selection 60 Panel A: Readability Tests .60 Panel B: Information Asymmetry Tests 60 Panel C: Earnings Informativeness Tests 60 Number of Words Test .61 Gross File Size Test .62 10 Net File Size Test 63 11 Bid Ask Spread Test 64 12 Market Illiquidity Test 65 13 ERC Test 66 14 FERC Test 67 15 Number of Positive Words Test 68 16 Number of Negative Words Test 69 17 Number of Neutral Words Test 70 18 Percentage of Positive Words Test 71 19 Percentage of Negative Words Test .72 20 Percentage of Neutral Words Test .73 21 Disclosure Committee Composition Descriptive Statistics 74 22 Disclosure Committee Composition Number of Words Test 75 23 Disclosure Committee Composition Gross File Size Test 76 24 Disclosure Committee Composition Net File Size Test 77 25 Disclosure Committee Composition Percentage of Positive Words Test 78 26 Disclosure Committee Composition Percentage of Negative Words test 79 27 Disclosure Committee Composition Bid-Ask Spread Test 80 28 Disclosure Committee Composition Illiquidity Test 81 29 Disclosure Committee Composition ERC Test 82 30 Disclosure Committee Composition FERC Test 83 31 Disclosure Committee Adoption and Current Material Weaknesses 84 32 Disclosure Committee Adoption and Future Material Weaknesses 85 33 Number of Words Test Excluding Unclear Adoption Timing Observations 86 34 Gross File Size Test Excluding Unclear Adoption Timing Observations 87 35 Net File Size Test Excluding Unclear Adoption Timing Observations .88 36 Bid-Ask Spread Test Excluding Unclear Adoption Timing Observations 89 37 Market Illiquidity Test Excluding Unclear Adoption Timing Observations .90 38 ERC Test Excluding Unclear Adoption Timing Observations 91 39 FERC Test Excluding Unclear Adoption Timing Observations 92 40 Bid-Ask Spread Test Measuring BA_SPREAD over the fiscal year 93 41 Market Illiquidity Test Measuring ILLIQUIDITY over the fiscal year 94 42 Residual Volatility Test .95 Table 28 - Disclosure Committee Composition Illiquidity Test Dependent Variable ILLIQUIDITYt Coef P-value INTERCEPT 0.100 0.969 MANAGER_ON_DCt -0.101 0.777 CEO_ON_DCt 0.088 0.790 CFO_ON_DCt 0.165 0.535 COO_ON_DCt 0.414 0.170 CRO_ON_DCt 0.213 0.610 GC_ON_DCt -0.276 0.290 ACCTOF_ON_DCt -0.212 0.447 IA_ON_DCt 0.316 0.326 DIRECTOR_ON_DCt -0.104 0.833 AC_ON_DCt 1.471 0.295 TURNOVERt-1 -0.589 0.005 *** MVEt-1 -0.163 0.132 RETURN_VOLt-1 0.187 0.481 GROSSFILESIZEt-1 0.095 0.504 FF_INDUSTRYFE Included YEARFE Included Number of Observations 235 Adjusted R 0.164 Notes: I estimate this model using ordinary least squares regression and cluster standard errors by company (Petersen 2009) ***, **, and * indicate p < 0.01, p