Do note disclosures influence value relevance more after financial statement placement becomes more standardized? Evidence from ASU 2011-05

58 Pages Posted: 20 Jan 2021 Last revised: 21 Oct 2021

See all articles by Matthew C. Cedergren

Matthew C. Cedergren

Santa Clara University

Changling Chen

University of Waterloo - School of Accounting and Finance

Kai Chen

Wilfrid Laurier University - School of Business & Economics

Victor Xiaoqi Wang

California State University, Long Beach

Date Written: October 20, 2021

Abstract

We examine whether financial statement note disclosures play an enhanced role in value relevance when the placement of line items among financial statements becomes more standardized and prominent. Specifically, we consider the setting of ASU 2011-05, which removed the option for firms to report other comprehensive income (OCI) in the statement of changes in stockholders’ equity. We report two main findings. First, using a larger sample and longer time period than early studies examining ASU 2011-05, we document that, relative to firms that were unaffected by the OCI reporting mandate, firms that changed OCI placement away from the statement of changes in stockholders’ equity exhibited greater increases in OCI value relevance after ASU 2011-05 became effective, in line with the FASB’s stated goal of raising the prominence of items reported in OCI. Our findings contradict the seemingly puzzling findings of early studies, which documented an incremental decrease in OCI value relevance for these firms. Second, we find that this incremental positive effect for firms that changed OCI placement is enhanced when OCI-related note disclosures are more specific, contain more numerical information, are more readable, are more stable from year to year, or are shorter in length. Collectively, our findings suggest that financial statement placement and note disclosure characteristics interact in a manner such that when financial statement line items influence valuation to a greater extent through more prominent placement, the qualitative characteristics of accompanying note disclosures tend to assume this role more prominently as well.

Keywords: Other comprehensive income, financial statement placement, value relevance, note disclosure, textual analysis

JEL Classification: M41, G14

Suggested Citation

Cedergren, Matthew C. and Chen, Changling and Chen, Kai and Wang, Victor Xiaoqi, Do note disclosures influence value relevance more after financial statement placement becomes more standardized? Evidence from ASU 2011-05 (October 20, 2021). Available at SSRN: https://ssrn.com/abstract=3766529 or http://dx.doi.org/10.2139/ssrn.3766529

Matthew C. Cedergren

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

Changling Chen (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

Kai Chen

Wilfrid Laurier University - School of Business & Economics ( email )

75 University Avenue West
Waterloo, Ontario N2L 3C5
Canada

Victor Xiaoqi Wang

California State University, Long Beach ( email )

1250 Bellflower Blvd
Long Beach, CA 90840
United States

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