Response of the EAA FRSC to the EFRAG/ANC/FRC discussion paper: 'Towards a Disclosure Framework for the Notes'

We summarise the response of the EAA’s FRSC to Towards a Disclosure Framework for the Notes, a Discussion Paper (DP) issued jointly by EFRAG, ANC and FRC. While supportive of much of the DP, and in particular of the underlying aim to place disclosures on a sounder conceptual foundation, we identify two broad themes for further development. The first concerns the DP’s diagnosis of the problem, which is that the existing financial reporting is characterised by, on the one hand, disclosure overload and, on the other hand, an absence of a conceptual framework for organising and communicating disclosures. Our review of the literature suggests much greater support for the second of these two factors than for the first. The second broad theme is the purpose of the proposed DF, and the principles that are derived from this purpose. Here, we stress the need for the framework to better accommodate the context within which financial statement disclosures are used. In practice, this context is characterised by variation in information, incentives and enforcement, each of which has a considerable effect on the appropriate disclosure policy and practice in any given situation.

Institutional pressures on financial services firms: the role of information systems in regulatory compliance

The financial crisis of 2008 led to new international regulatory controls for the governance, risk and compliance of financial services firms. Information systems play a critical role here as political, functional and social pressures may lead to the deinstitutionalization of existing structures, processes and practices. This research examines how an investment management system is introduced by a leading IT vendor across eight client sites in the post-crisis era. Using institutional theory, it examines changes in working practices occurring at the environmental and organizational levels and the ways in which technological interventions are used to apply disciplinary effects in order to prevent inappropriate behaviors. The results extend the constructs of deinstitutionalization and identify empirical predictors for the deinstitutionalization of compliance and trading practices within financial organizations.

Mandatory and voluntary information disclosure and the effects on financial analysts: evidence from China

Purpose – This paper aims to make a comparison, different from existing literature solely focusing on voluntary earnings forecasts and ex post earnings surprise, between the effects of mandatory earnings surprise warnings and voluntary information disclosure issued by management teams on financial analysts in terms of the number of followings and the accuracy of earnings forecasts. Design/methodology/approach – This paper uses panel data analysis with fixed effects on data collected from Chinese public firms between 2006 and 2010. It uses an exogenous regulation enforcement to minimise the endogeneity problem. Findings – This paper finds that financial analysts are less likely to follow firms which mandatorily issue earnings surprise warnings ex ante than those voluntarily issue earnings forecasts. Moreover, ex post, they issue less accurate and more dispersed forecasts on former firms. The results support Brown et al.’s (2009) finding in the USA and suggest that the earnings surprise warnings affect information asymmetries. Practical implications – This paper justifies the mandatory earnings surprise warnings policy issued by Chinese Securities Regulatory Commission in 2006. Originality/value – Mandatory earnings surprise is a unique practical regulation for publicly listed firms in China. This paper, for the first time, provides empirical evaluation on the effectiveness of a mandatory information disclosure policy in China. Consistent with existing literature on information disclosure by public firms in other countries, this paper finds that, in China, voluntary information disclosure captures more private information than mandatory information disclosure on corporate earnings ability.

Communicating information about medication side effects: effects on satisfaction, perceived risk to health, and intention to comply

Previous research has shown that people's evaluations of explanations about medication and their intention to comply with the prescription are detrimentally affected by the inclusion of information about adverse side effects of the medication. The present study (Experiment 1) examined which particular aspects of information about side effects (their number, likelihood of occurrence, or severity) are likely to have the greatest effect on people's satisfaction, perception of risk, and intention to comply, as well as how the information about side effects interacts with information about the severity of the illness for which the medication was prescribed. Across all measures, it was found that manipulations of side effect severity had the greatest impact on people's judgements, followed by manipulations of side effect likelihood and then number. Experiments 2 and 3 examined how the severity of the diagnosed illness and information about negative side effects interact with two other factors suggested by Social Cognition models of health behaviour to affect people's intention to comply: namely, perceived benefit of taking the prescribed drug, and the perceived level of control over preventing or alleviating the side effects. It was found that providing people with a statement about the positive benefit of taking the medication had relatively little effect on judgements, whereas informing them about how to reduce the chances of experiencing the side effects had an overall beneficial effect on ratings.

Comparison of two methods of presenting risk information to patients about the side effects of medicines

Objective: To determine whether the use of verbal descriptors suggested by the European Union (EU) such as "common" (1-10% frequency) and "rare" (0.01-0.1%) effectively conveys the level of risk of side effects to people taking a medicine. Design: Randomised controlled study with unconcealed allocation. Participants: 120 adults taking simvastatin or atorvastatin after cardiac surgery or myocardial infarction. Setting: Cardiac rehabilitation clinics at two hospitals in Leeds, UK. Intervention: A written statement about one of the side effects of the medicine (either constipation or pancreatitis). Within each side effect condition half the patients were given the information in verbal form and half in numerical form (for constipation, "common" or 2.5%; for pancreatitis, "rare" or 0.04%). Main outcome measure: The estimated likelihood of the side effect occurring. Other outcome measures related to the perceived severity of the side effect, its risk to health, and its effect on decisions about whether to take the medicine. Results: The mean likelihood estimate given for the constipation side effect was 34.2% in the verbal group and 8.1% in the numerical group; for pancreatitis it was 18% in the verbal group and 2.1% in the numerical group. The verbal descriptors were associated with more negative perceptions of the medicine than their equivalent numerical descriptors. Conclusions: Patients want and need understandable information about medicines and their risks and benefits. This is essential if they are to become partners in medicine taking. The use of verbal descriptors to improve the level of information about side effect risk leads to overestimation of the level of harm and may lead patients to make inappropriate decisions about whether or not they take the medicine.

The benefits of providing benefit information in a patient information leaflet

Objective: To examine the effects of providing two different types of written information about medicine benefits in a patient information leaflet (PIL). Setting: Participants were 358 adult volunteers from the general population recruited from a London railway station and central Reading. Method: The study used a controlled empirical methodology in which people were given a hypothetical, but realistic, scenario about visiting their doctor and being prescribed medication. They then read an information leaflet about the medicine that contained neither, one, or both benefit statements, and finally completed a number of Likert rating scales. Outcome measures included perceived satisfaction and helpfulness of the information, effectiveness and appropriateness of the medicine, benefit and risk to health, and intention to comply. Key findings: Both types of benefit information led to significantly higher ratings on all of the measures taken. Conclusions: Provision of a relatively short ‘benefit’ statement can significantly improve people’s judgements and intention to take a medicine. The findings are important and timely as the European Union is currently considering reviewing their regulations to allow for the inclusion of limited non-promotional benefit information in PILs.

The benefits of providing benefit information: examining the effectiveness of provision of simple benefit statements on people's judgements about a medicine

Three experiments examined the effects of adding information about medication benefits to a short written explanation about a medicine. Participants were presented with a fictitious scenario about visiting the doctor, being prescribed an antibiotic and being given information about the medicine. They were asked to make various judgements relating to the information, the medicine and their intention to take it. Experiment 1 found that information about benefits enhanced the judgements, but did not influence the intention to comply. Experiment 2 compared the relative effectiveness of two different forms of the benefit statement, and found that both were effective in improving judgements, but had no effect on intention to comply. Experiment 3 compared the effectiveness of the two forms of benefit information but participants were told that the medicine was associated with four named side effects. Both types of statement improved ratings of the intention to comply, as well as ratings on the other measures. The experiments provide fairly consistent support for the inclusion of benefit information in medicine information leaflets, particularly to balance concerns about side effects.

Knowledge and information evaluation practice: an exploratory study in a construction firm

There are a number of challenges associated with managing knowledge and information in construction organizations delivering major capital assets. These include the ever-increasing volumes of information, losing people because of retirement or competitors, the continuously changing nature of information, lack of methods on eliciting useful knowledge, development of new information technologies and changes in management and innovation practices. Existing tools and methodologies for valuing intangible assets in fields such as engineering, project management and financial, accounting, do not address fully the issues associated with the valuation of information and knowledge. Information is rarely recorded in a way that a document can be valued, when either produced or subsequently retrieved and re-used. In addition there is a wealth of tacit personal knowledge which, if codified into documentary information, may prove to be very valuable to operators of the finished asset or future designers. This paper addresses the problem of information overload and identifies the differences between data, information and knowledge. An exploratory study was conducted with a leading construction consultant examining three perspectives (business, project management and document management) by structured interviews and specifically how to value information in practical terms. Major challenges in information management are identified. An through-life Information Evaluation methodology (IEM) is presented to reduce information overload and to make the information more valuable in the future.

Variable selection for financial distress classification using a genetic algorithm

This paper is concerned with the use of a genetic algorithm to select financial ratios for corporate distress classification models. For this purpose, the fitness value associated to a set of ratios is made to reflect the requirements of maximizing the amount of information available for the model and minimizing the collinearity between the model inputs. A case study involving 60 failed and continuing British firms in the period 1997-2000 is used for illustration. The classification model based on ratios selected by the genetic algorithm compares favorably with a model employing ratios usually found in the financial distress literature.

International financial centres, office market rents and volatility

Despite continuing developments in information technology and the growing economic significance of the emerging Eastern European, South American and Asian economies, international financial activity remains strongly concentrated in a relatively small number of international financial centres. That concentration of financial activity requires a critical mass of office occupation and creates demand for high specification, high cost space. The demand for that space is increasingly linked to the fortunes of global capital markets. That linkage has been emphasised by developments in real estate markets, notably the development of global real estate investment, innovation in property investment vehicles and the growth of debt securitisation. The resultant interlinking of occupier, asset, debt and development markets within and across global financial centres is a source of potential volatility and risk. The paper sets out a broad conceptual model of the linkages and their implications for systemic market risk and presents preliminary empirical results that provide support for the model proposed.

Selecting from amongst non–nested conditional variance models: information criteria and portfolio determination

We consider the finite sample properties of model selection by information criteria in conditionally heteroscedastic models. Recent theoretical results show that certain popular criteria are consistent in that they will select the true model asymptotically with probability 1. To examine the empirical relevance of this property, Monte Carlo simulations are conducted for a set of non–nested data generating processes (DGPs) with the set of candidate models consisting of all types of model used as DGPs. In addition, not only is the best model considered but also those with similar values of the information criterion, called close competitors, thus forming a portfolio of eligible models. To supplement the simulations, the criteria are applied to a set of economic and financial series. In the simulations, the criteria are largely ineffective at identifying the correct model, either as best or a close competitor, the parsimonious GARCH(1, 1) model being preferred for most DGPs. In contrast, asymmetric models are generally selected to represent actual data. This leads to the conjecture that the properties of parameterizations of processes commonly used to model heteroscedastic data are more similar than may be imagined and that more attention needs to be paid to the behaviour of the standardized disturbances of such models, both in simulation exercises and in empirical modelling.

Bilingual 'tagging' of financial accounts in Demotic and Greek

‘Bilingual’ documents, with text in both Demotic and Greek, can be of several sorts, ranging from complete translations of the same information (e.g. Ptolemaic decrees) to those where the information presented in the two languages is complementary (e.g. mummy labels). The texts discussed in this paper consist of a number of examples of financial records where a full account in one language (L1) is annotated with brief pieces of information in a second language (L2). These L2 ‘tags’ are designed to facilitate extraction of summary data at another level of the administration, functioning in a different language, and probably also to make the document accessible to those who are not literate in the L1.

The role of Investment Management Systems in regulatory compliance: a Post-Financial Crisis study of displacement mechanisms

The financial crisis of 2007–2009 and the resultant pressures exerted on policymakers to prevent future crises have precipitated coordinated regulatory responses globally. A key focus of the new wave of regulation is to ensure the removal of practices now deemed problematic with new controls for conducting transactions and maintaining holdings. There is increasing pressure on organizations to retire manual processes and adopt core systems, such as Investment Management Systems (IMS). These systems facilitate trading and ensure transactions are compliant by transcribing regulatory requirements into automated rules and applying them to trades. The motivation of this study is to explore the extent to which such systems may enable the alteration of previously embedded practices. We researched implementations of an IMS at eight global financial organizations and found that overall the IMS encourages responsible trading through surveillance, monitoring and the automation of regulatory rules and that such systems are likely to become further embedded within financial organizations. We found evidence that some older practices persisted. Our study suggests that the institutionalization of technology-induced compliant behaviour is still uncertain.

Information and efficiency: goal arrival in soccer betting

An efficient market incorporates news into prices immediately and fully. Tests for efficiency in financial markets have been undermined by information leakage. We test for efficiency in sports betting markets – real-world markets where news breaks remarkably cleanly. Applying a novel identification to high-frequency data, we investigate the reaction of prices to goals scored on the ‘cusp’ of half-time. This strategy allows us to separate the market's response to major news (a goal), from its reaction to the continual flow of minor game-time news. On our evidence, prices update swiftly and fully.