Complementarity between Audited Financial Reporting and Voluntary Disclosure: The Case of Former Andersen Clients

Ball and Shivakumar (2008) suggest mandatory periodic reporting disciplines disclosure and encourages timely voluntary disclosure. We examine this hypothesis using the shock to reporting quality experienced by former Arthur Andersen clients after they were forced to switch auditors. Consistent with the confirmatory role of mandatory reporting, we find that former Andersen clients increase disclosure following the switch. They increase forecasting frequency and enhance forecasting precision and specificity. They also show less return concentration around earnings announcements in bad-news quarters, consistent with timelier release of bad news (Rowchowdury and Sletton 2012). Our findings demonstrate complementarity between audit quality and voluntary disclosures. We thank seminar participants at Washington University in St. Louis.