Do Note Disclosures Influence Value-Relevance More When Managers Lose Financial Statement Placement Discretion? Evidence From ASU 2011–05

We examine whether financial statement note disclosures play an enhanced role in value relevance when managers lose the ability to convey information via financial statement placement discretion. Specifically, we consider the setting of ASU 2011-05, which removed the option for firms to report other comprehensive income (OCI) in the statement of changes in stockholders’ equity. We report two main findings. First, using a larger sample and longer time period than early studies examining ASU 2011-05, we document that, relative to firms that were unaffected by the OCI reporting mandate, firms that changed OCI placement away from the statement of changes in stockholders’ equity exhibited greater increases in OCI value relevance after ASU 2011-05 became effective, in line with the FASB’s stated goal of raising the the prominence of items reported in OCI. Our findings contradict the seemingly puzzling findings of early studies, which documented an incremental decrease in OCI value relevance for these firms. Second, we find that this incremental positive effect for firms that changed OCI placement is enhanced when OCI-related note disclosures are more specific, contain more numerical information, are more readable, are more stable from year to year, and are shorter in length. Collectively, our findings suggest that financial statement placement and note disclosure characteristics interact in a manner such that when managers lose their ability to convey information via their financial statement placement choice, note disclosures become a relatively more important vehicle in the determination of value relevance