The relation between disclosure quality, income smoothing and earnings' timeliness

Abstract

High quality information is vital for a good communication between the corporation and the investing community. Companies can communicate their information by means of disclosure and recognition. Disclosure is the process of providing information in the financial statements through footnotes, management and discussion analysis, supplementary schedules, or other means. Recognition is the process of incorporating an item in the balance sheet or income statement (IAS Board Framework). Although investors as well as financial analysts could make better investment decisions when having more insights into this interaction, little research has been done about the interaction between disclosure quality and recognition practices. Therefore, this paper concentrates on the following research questions: do disclosure quality and recognition practices complement each other, and are high-quality disclosures an assurance for less earnings smoothing? More specifically, we examine whether the ratings of the Belgian Association of Financial Analysts (i.e. a proxy for disclosure quality of Belgian listed firms) are (1) related to the level of discretionary accruals, a measure of earnings smoothing, and (2) related to the earnings-return association, a measure of earnings timeliness.