Market Effects of Recognition and Disclosure

Abstract Our recognition and disclosure model reveals that price informativeness is determined by the interaction of the qualities of three information sources—the recognized amount, the disclosed information, and the information revealed by price—and accounting expertise acquisition. It also reveals that recognition of an accounting amount alters each of these, thereby affecting price informativeness. Perhaps surprisingly, we find that recognition of a highly unreliable accounting amount, rather than simply disclosing it, can result in greater price informativeness. Likewise, recognition of a highly reliable amount can result in lower price informativeness. Our findings suggest that, because of the effects of aggregation, basing recognition decisions on reliability alone is too simplistic. Reliability relative to relevance is key, not reliability per se. We also find that recognition and disclosure affect the coefficients in a regression of price on accounting amounts.