Date of Degree
PhD (Doctor of Philosophy)
Cristi A. Gleason
W. Bruce Johnson
In the early 2000s, the Securities and Exchange Commission (SEC) called on firms to provide new MD &A disclosures about their critical accounting estimates. The new disclosures outline how reasonably likely changes in firms' highly uncertain accounting estimates would affect earnings. Because the new disclosure practice potentially highlights accrual estimates with a reduced level of reliability (i.e. greater estimation error) arising from uncertainty in the accrual measurement process, I examine whether the presence of a critical accounting estimate (CAE) disclosure partially explains cross-sectional variation in the value relevance of balance sheet items. Using a sample of non-financial and non-utility S &P 500 firms from 2004 to 2009, I find the value relevance of a balance sheet item is negatively associated with the presence of a related CAE disclosure. To corroborate my value relevance findings, I also examine whether the predictive value of accruals with respect to future cash flows and accrual noise, which are two accounting-based characteristics of useful accounting information, are associated with the presence of a CAE disclosure. I find the incremental predictive value of accruals with respect to future cash flows (accrual noise) is negatively (positively) associated with the presence of a CAE disclosure. Overall, these results suggest investors perceive balance sheet items accompanied by a related, account-specific CAE disclosure to have lower reliability, and consistent with investors' perceptions, accrual estimates have less predictive value and are noisier when these disclosures are present. Other findings indicate that the magnitude of estimation error and disclosure complexity play a role in the extent to which investors reduce their reliability perceptions in the presence of a CAE disclosure.
Copyright 2012 Matthew Glendening
Glendening, Matthew Ryan. "Critical accounting estimate dislosures and the value relevance of balance sheet items." dissertation, University of Iowa, 2012.