Implications of Disclosing Order Backlog

Abstract

Features of the requirement to disclose order backlog raise questions about the usefulness of these disclosures in practice. Despite these concerns, I provide evidence that disclosing the dollar amount of order backlog in the 10-K has several implications for firms in the manufacturing sector. On average, firms that disclose order backlog have significantly higher forward earnings response coefficients and greater investment efficiency. These effects, however, are concentrated amongst firms for which order backlog is expected to be a stronger signal of demand (i.e., firms that follow more of a make-to-order business model). Disclosers also have less persistent operating profitability when order backlog is a relatively more important signal of demand, suggesting that although order backlog can provide useful information for valuation and monitoring purposes, it can also influence competitors’ product market and investment decisions. The results should be of interest to regulators as they examine Regulation S-K disclosure requirements, and firms and standard setters as they prepare for greater forward-looking revenue disclosures under ASC 606