The influence of opportunistic capital structure disclosure in international financial reporting on nonprofessional investors

• Published in: Journal of international accounting, auditing & taxation Vol. 42; p. 100378
• Main Authors: Elkins, Hamilton, Entwistle, Gary, Schmidt, Regan N.
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.03.2021
• Subjects: Capital structure; IFRS; Investor decision-making; Opportunistic disclosures; Valuation; Investor decision-making; IFRS; Opportunistic disclosures; Valuation; Capital structure
• ISSN: 1061-9518; 1879-1603
• DOI: 10.1016/j.intaccaudtax.2021.100378

International Financial Reporting Standards (IFRS) promote participation in a global capital market by providing investors a basis to compare foreign and domestic firms’ investment worthiness. Nonprofessional investors, who may lack the necessary sophistication, knowledge, and skill to differentiate firms across multiple reporting regimes, should particularly benefit from readily comparable financial statement information. However, the capital disclosure requirements of IFRS afford opportunistic managers an opening to mislead investors. Through a controlled experiment we observe that an ‘optimized’ disclosure of capital structure leads nonprofessional investors to ascribe higher valuations to a firm’s shares compared to capital structure derived from the balance sheet. We also find nonprofessional investors’ stock purchasing decisions respond to the higher firm valuations. Further analysis identifies formal pathways that enable the optimized disclosure’s influence on investor decision-making. We also find cautionary guidance advising of potential opportunistic management disclosure to be ineffective. Our study contributes to the international accounting literature and has important implications for investors, auditors, and standard setters in the international financial reporting community.