The Tone from Above: The Effect of Communicating a Supportive Regulatory Strategy on Reporting Quality

• Author: JACCO L. WIELHOUWER,JUAN P. MENDOZA,SANNE R. VAN DUIN,HENRI C. DEKKER
• Published date: 01 May 2018
• DOI: http://doi.org/10.1111/1475-679X.12205
• Date: 01 May 2018

DOI: 10.1111/1475-679X.12205

Journal of Accounting Research

Vol. 56 No. 2 May 2018

Printed in U.S.A.

The Tone from Above: The Effect

of Communicating a Supportive

Regulatory Strategy on Reporting

Quality

SANNE R. VAN DUIN,

∗HENRI C. DEKKER,

∗

JACCO L. WIELHOUWER,

∗AND JUAN P. MENDOZA

∗

Received 31 October 2015; accepted 20 December 2017

ABSTRACT

In collaboration with the Authority for the Financial Markets in the Nether-

lands, we manipulate the content of official letters that instruct financial in-

termediaries to submit a mandatory self-assessment. As part of the Registered

Report Process, we submitted our hypotheses, experimental procedure, and

planned statistical analyses before data collection. We predicted that a request

indicating a supportive regulatory attitude has a positive effect on report-

ing quality on average. We also predicted this effect to be stronger for small

firms and for firms with a long-term orientation, and to become negative for

firms with a short-term orientation. Planned analyses show that a support-

ive letter reduced reporting quality unless firms had a long-term orientation,

∗School of Business and Economics, Vrije Universiteit Amsterdam.

Accepted by Robert Bloomfield. This paper is the final Registered Report resulting

from the Registration-based Editorial Process (REP) implemented by JAR for its 2017

conference; details of the process are available here: https://research.chicagobooth.edu/

arc/journal-of-accounting-research/2017-registered-reports. The accepted proposal and on-

line appendices for this report are available at https://research.chicagobooth.edu/arc/

journal-of-accounting-research/online-supplements. We thank the Authority for the Finan-

cial Markets in the Netherlands for participating in this study and providing us access to the

data. The data that were collected as part of this study are proprietary and cannot be shared.

We thank the anonymous reviewer for helpful suggestions throughout the Registered Report

Process. We explicitly note that all statements and opinions in this article reflect those of the

authors, not of the Authority for Financial Markets. Authors did not receive any compensation

(in any form) for conducting the study and for providing advice based on the results.

467

Copyright C, University of Chicago on behalf of the Accounting Research Center,2018

468 S.R.VAN DUIN,H.C.DEKKER,J.L.WIELHOUWER,AND J.P.MENDOZA

supporting the moderating influence of time horizon, but providing no sup-

port for the expected average effect or for moderation by firm size.

JEL codes: G28; K42; M48

Keywords: reporting quality; responsive regulation; support; time horizon

1. Introduction

Across diverse regulatory settings, authorities request proprietary informa-

tion from firms as part of their monitoring and supervision strategies. This

is particularly relevant in contexts in which there is a significant informa-

tion gap between the firm and the authority (Besanko and Sappington

[1987], Pautz and Rinfret [2016]). In the contexts of tax, customs, finan-

cial, or environmental regulations, for instance, firms are commonly re-

quested to complete and submit mandatory self-assessments in which they

report sensitive information. Evidently, the effectiveness of the authorities’

supervision strategies directly depends on the quality of the information

that firms provide (Peeters [2006]). Imprecise, incomplete, or untimely in-

formation obstructs monitoring and makes supervision more difficult, time

consuming, and costly.

Self-reporting commonly involves a series of actions, which include

gathering detailed information, completing extensive questionnaires, and

meeting tight deadlines (Ernst and Young [2012]). The quality of the infor-

mation reported to the authorities is determined by these actions, as they

directly influence precision and comprehensiveness, as well as the extent to

which firms voluntarily report additional information. In this sense, report-

ing quality can be conceptualized as a behavioral outcome that depends on

firms’ motivation and capacity to attain high reporting quality.

Because effective supervision benefits greatly from high reporting

quality, a fundamental question is whether authorities can exert influence

to improve reporting quality. This is a non-trivial problem, as it may not be

sufficiently addressed through deterrence (i.e., by threatening firms with

penalties for not reporting information with the highest level of quality).

Firms may comply with minimum reporting requirements, and yet provide

low reporting quality (e.g., by reporting approximate figures). Establishing

whether low reporting quality sufficiently reflects reality—and whether it

deserves a punishment—imposes additional challenges for the authorities.

From a supervisory standpoint, the core problem is that authorities may

explicitly request the highest level of reporting quality, but in practice may

have limited resources to monitor and assess the level of reporting quality

itself.

Following the literature on responsive regulation (Braithwaite [2003,

2007]), one way in which authorities might be able to influence report-

ing quality is by signaling a supportive regulatory strategy toward firms.

The rationale is that, as the strategy focuses more on guidance and

support, firms’ motivations to attain high reporting quality increase. The

THE TONE FROM ABOVE 469

concept of responsive regulation establishes that there are distinct types

of regulatory strategies, which vary in terms of how supportive they are

(Braithwaite [2007]). A strategy that focuses less on deterrence and more

on education and service delivery motivates firms to share information.

Moreover, an educational approach helps firms to “make sense” of what

is requested from them and encourages compliance (Fairman and Yapp

[2005]). In this sense, support enhances the perception that the author-

ity is fair and trustworthy, and prompts reciprocity from at least a fraction

of supervised firms (Alford and Speed [2006]). Overall, there are distinct

reasons to expect a positive effect of a supportive strategy on how firms

respond to the authority’s requests, including the request to provide high-

quality information.

Because not all firms can be visited at the same time, authorities have

limited options to present themselves as helpful and exert this type of sup-

portive influence at an industry-wide scale. For a large number of firms,

interactions with the authority are constrained to infrequent official com-

munications (in the form of formal letters). Taking this point into consid-

eration, in this study we examine whether reporting quality is influenced

by the extent to which official communications reflect a supportive regula-

tory strategy. Our hypothesis is that, as compared to a low support letter, a

high support letter leads to higher reporting quality. We acknowledge, how-

ever, that the strength of the expected effect may vary depending on firms’

specific characteristics and motivations (Braithwaite [2003, 2007]). Hence,

we further hypothesize that the expected effect is weaker for larger firms

(which might be less sensitive to the content of official communications),

stronger for long-term oriented firms (which might see reporting quality as

an investment), and reversed for short-term oriented firms (which might

perceive support as a signal of a weaker enforcement strategy and seize the

opportunity to report low-quality information).

To test these hypotheses, we conduct a field experiment in the regulatory

setting of financial intermediation in the Netherlands. The Authority for

the Financial Markets (AFM), which supervises the financial markets and

financial services providers in this country, granted us permission to intro-

duce an experimental treatment in their 2017 communications. The AFM

employs a supervision instrument called Market Monitor (MM), which is a

mandatory, standardized self-assessment instrument and is sent out to ap-

proximately 7,000 financial intermediaries on a yearly basis. Through this

instrument, firms provide an elaborate amount of sensitive information re-

lated to, for example, financial products offered, specific financial interme-

diation activities, number of employees and customer relationships, as well

as detailed accounting and managerial information. Every year, the AFM

sends three letters to each firm providing information on how to complete

and when to submit the MM.

Based on prior experience, the AFM recognizes that intermediaries vary

in the amount and precision of the information that they report. After a

series of discussions with the AFM, it was jointly determined that there are