Corporate Structure and the Informativeness of Provision Management: Evidence from the Netherlands

This study considers the influence of Dutch governance structures on the informativeness of reported unexpected changes in provisions. Characteristics of the corporate governance system in the Netherlands provide a unique opportunity to investigate the influence of characteristics of the governance system on market reactions to financial disclosures. This governance system allows a distinction between structure companies, where supervisors’ disciplinary power is high, and nonstructure companies, where supervisors’ disciplinary power is low. Characteristics of the Dutch financial accounting system are comparable to those of Anglo-Saxon systems. I investigate investors’ response to the disclosure of unexpected changes in provisions by means of an event study which focuses on the abnormal stock returns during two days surrounding the disclosure date. Additionally, I examine analysts’ forecast revisions around the disclosure date by using I/B/E/S earnings forecasts. The empirical evidence indicates that unexpected provisions are positively associated with abnormal stock returns and abnormal forecast revisions, suggesting that non-structure companies use unexpected changes in provisions to signal future performance. The positive relationship between unexpected changes in provisions and the market reaction is more pronounced when my proxy for information asymmetry is high. Furthermore, I find that unexpected changes in provisions of structure companies are significantly less informative. I argue that this is attributable to the fact that supervisors of structure companies exercise more discipline over company management than supervisors of non-structure companies.