The Effect of Recognition versus Disclosure on Investment Efficiency

We investigate the implication of recognition versus disclosure on investment efficiency. Extant theories suggest that recognised amounts are more reliably measured than disclosed amounts and that inattentive investors process recognised and disclosed information differently. Both explanations imply that recognition is associated with higher investment efficiency than is disclosure. We test these two implications using the adoption of SFAS No. 123R, which requires recognition of previously disclosed employee stock option (ESO) expense. We find that investment efficiency improves in the post SFAS No. 123R period and, as expected, mainly for heavy ESO users. We also document evidence on why recognition and disclosure have differential effect on investment efficiency that is consistent with the two explanations.

This seminar is organised by the Erasmus Accounting Research Group.