Market Effects of Recognition and Disclosure

Our recognition and disclosure model reveals that accounting expertise acquisition and three informational forces, the quality of the recognized amount, the quality of disclosed information, and the quality of information revealed by price, have offsetting and countervailing effects on market performance. It also reveals that recognition of an accounting amount potentially alters each of these forces and expertise acquisition, thereby affecting market performance. 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 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, even when the relevance and reliability of the accounting amounts are the same