The signalling value of provisions : A study of the relation between provisions and firm performance

Abstract: To be able to understand future firm performance it is important to recognize and correctly evaluate what constitutes a signal. This study investigates if provisions contain signalling value regarding future firm performance. The study is conducted on firms listed on the Nasdaq OMX Stockholm from 2001 to 2010, constituting a sample of 2173 firm years. All the provision data has been manually collected from each of the firm’s annual reports. By using both univariate and multivariate analyses, the study provides new evidence regarding the association between provisions and firm performance. The findings indicate that firms who recognise restructuring provisions experience a performance improvement. The performance improvement is tied to the size of the restructuring provision i.e. the signal. Warranty and litigation provisions show no indications of having any relation to future firm performance. Thus, large restructuring provisions contain a signal of performance improvement, whereas warranty and litigation provisions do not. The thesis contributes to existing literature by providing new insight of how provisions functions as signals of firm performance