Do Managers Issue More Voluntary Disclosure When GAAP Limits Their Reporting Discretion in Financial Statements?

Abstract

We examine whether managers convey more information via voluntary disclosure channels when standard-setters limit managers’ discretion in GAAP. We estimate the extent to which standard setters limit managers’ discretion by counting the number of times obligatory modal verbs are mentioned in the text of each standard. Our primary findings indicate managers issue more earnings forecasts, are more likely to disclose non-GAAP earnings, and provide longer yet more readable MD&A disclosures when GAAP limits managers’ discretion. We find the effect is stronger when investors demand more information and when there is better external oversight, and weaker when managers have conflicting reporting objectives. A difference-in-differences analysis around standard changes corroborates these results by finding more non-GAAP adjustments and greater discussion about the standard and its underlying transaction in the MD&A when the new standard limits managers’ discretion more than its predecessor. Collectively, our results suggest managers use additional channels to convey important information when accounting standards limit their ability to do so.