The disclosure policy of the firm in an efficient market

This study analyzes the information content of the financial reports of the management-controlled firm in an efficient market. The firm's disclosure fulfills two roles: it is the basis of the principal-agent contract—stewardship role, and it is an input to the market price informativeness (decision making) role. Optimal disclosure is derived as the outcome of the firm's owner-manager-potential buyer game. The seller and the buyer maintain principal-agent relationships with the manager, who alone observes verifiable and unverifiable information on the value of the firm. The market's price of the firm, as well as the manager's compensation, depend on the firm's reports. The firm's owner directs the manager to report verifiable information, at least, (due to the threat of coalition forming) and stewardship information, at most. The market's reaction to the financial reports depends on the information available to the market prior to their release.     

Engagement partner specialization and corporate disclosure transparency

This paper explores the association of audit partners' industry specialization with corporate disclosure transparency and the latter's informativeness. The distinctive institutional designs of partner signature requirement and Information Disclosure and Transparency Ranking System (IDTRS) adopted in Taiwan allow us to empirically address the issue. We posit and find that the rankings from the IDTRS are higher for firms audited by industry specialist engagement partners than for firms audited by non-specialist engagement partners. Additionally, the results show that the probability of informed trade (PIN) proxy for information asymmetry is negatively associated with the rankings for clients of industry specialist engagement partners, but not for clients of industry non-specialist engagement partners. The results are robust with respect to alternative estimation method and alternative measures of industry specialization. Overall, the evidence suggests that industry specialist engagement partners enhance the credibility of corporate disclosure transparency, through which information asymmetry is further declined. The evidence provides policy implications to the partner signature requirement adopted in Taiwan and China.     

The real effects of stock prices: learning,disclosure and corporate social responsibility

This paper develops a tractable model to study the impact of corporate social responsibility (CSR) on real decisions (i.e., production and disclosure decisions) of a firm which can learn from the stock price. Firms with high CSR disclose more precise information, improving the stock liquidity and price efficiency, which also benefit liquidity traders and consumers. Interventions by regulators in firms’ disclosure decisions, such as mandatory disclosure, can improve social welfare, but their effectiveness depends on the degree of CSR. We also discuss the implications of learning from the price.     

The effects of mandatory ESG disclosure on price discovery efficiency around the world

We examine the effect of mandatory environmental, social and governance (ESG) disclosure on firms' price discovery efficiency around the world. Using data from 45 countries between 2000 and 2020 and a difference-in-differences method, we find that mandatory ESG disclosure increases firm-level stock price non-synchronicity and timeliness of price discovery, suggesting more firm-specific information is incorporated into stock prices in a more timely manner. Mandatory ESG disclosure improves price discovery efficiency more in countries with strong demands for ESG information and in firms with poor disclosure incentives. Mandatory ESG disclosure also leads to other real market changes, such as lower stock returns, greater changes in institutional ownership and higher firm valuation.     

Corporate Disclosure Policy and the Informativeness of Stock Prices

We examine the association between voluntary corporate disclosure and the informativeness of stock prices. We measure corporate disclosure using the AIMR-FAF annual corporate disclosure ratings. We define price informativeness by the association between current stock returns and future earnings changes: more informative stock price changes contain more information about future earnings changes. To measure this association, we regress current returns against (current and) future earnings changes. The aggregated coefficient on the future earnings changes, which we refer to as the future ERC, is our measure of informativeness (association).We hypothesize and find that greater disclosure is associated with stock prices that are more informative about future earnings (i.e., higher future ERC). These results provide empirical support for the widely held, but heretofore empirically undocumented, belief that greater disclosure provides information benefits to investors.     

Board structure and the informativeness of risk disclosure: Evidence from MENA emerging markets

We examine whether board characteristics affect firms' decision to voluntarily disclose informative information about their risk profiles. We base our study on data from 320 listed firms in nine MENA emerging markets (789 observations) over the period from 2007 to 2009. Our study offers significant contributions to the growing risk disclosure literature. It provides new empirical evidence that information driven by some board characteristics affects the perceived relevance of narrative risk information. Our findings suggest that the composition of the board and its size enhance the informativeness of risk disclosure as it allows investors to better predict future earnings growth. A further finding is that a CEO/Chairperson duality does not impact the way investors trust risk disclosures.     

Career concerns and mandated disclosure

This paper examines the effects of mandated disclosure on the design of contracts and induced behavior in the presence of career concerns. We analyze the impact of two key properties of a mandated performance measure that is publicly disclosed: its sensitivity to the agent’s effort and its informativeness about the agent’s ability. We show conditions under which the agent’s effort (and the firm’s output) and the pay-for-performance weight critically depend on these two properties. In particular, when the mandated measure is sufficiently noisy, the pay-for-performance weight always decreases relative to a setting with no mandated measure. But when the mandated measure’s noise is close to that of the existing performance measure, the effect of a mandated measure on the pay-for-performance weight depends on the effort-sensitivity and informativeness of the measure. We also characterize settings where a mandated disclosure would be desirable or not; variations arise because mandated disclosures can increase both effort and risk. Our results imply that mandating the public disclosure of performance measures, particularly measures that are relatively informative about ability but are difficult to influence through managerial effort, may have the unintended consequence of generating inefficiencies in firms’ employment contracts.     

Trade disclosure regulation in markets with negotiated trades

In dealership markets disclosure of size and price of detailsof public trades is typically incomplete. We examine whetherfull and prompt disclosure of public-trade details improvesthe welfare of a risk-averse investor. We analyze a model ofdealership market where a market maker first executes a publictrade and then offsets her position by trading with other marketmakers. We distinguish between quantity risk and price revisionrisk. We show that if the market maker learns some informationabout the motive behind public trade, neither regime is unambiguouslywelfare superior. This is because greater transparency improvesquantity risk sharing but worsens price revision risk sharing.     

Stock price informativeness,cross-listings,and investment decisions

We show that a cross-listing enables firms to obtain, from the stock market, more precise information about the value of their growth opportunities. Thus, cross-listed firms make better investment decisions and trade at a premium. This theory of cross-listings implies that the sensitivity of investment to stock prices is larger for cross-listed firms. Moreover, the cross-listing premium is positively related to the size of growth opportunities and negatively related to the quality of managerial information. The sensitivity of the premium to the size of growth opportunities increases with factors that strengthen the impact of the cross-listing on price informativeness.     

Market Effects of Recognition and Disclosure

Our recognition and disclosure model reveals that price informativeness is determined by the interaction of the qualities of three information sources—the recognized amount, the disclosed information, and the information revealed by price—and accounting expertise acquisition. It also reveals that recognition of an accounting amount alters each of these, thereby affecting price informativeness. Perhaps surprisingly, we find that recognition of a highly unreliable accounting amount, rather than simply disclosing it, can result in greater price informativeness. Likewise, recognition of a highly reliable amount can result in lower price informativeness. Our findings suggest that, because of the effects of aggregation, basing recognition decisions on reliability alone is too simplistic. Reliability relative to relevance is key, not reliability per se. We also find that recognition and disclosure affect the coefficients in a regression of price on accounting amounts.     

Institutional ownership and the informativeness of disclosure tone

Disclosure tone is an important qualitative characteristic of managerial disclosures. There is mixed evidence on the role of tone in disclosure strategy. While some studies highlight the informativeness of disclosure tone, other studies provide evidence consistent with an information obfuscation role. We conjecture that the mixed evidence may be because prior studies have not explicitly modeled the role of oversight over managerial disclosure. Using an exogenous shock to institutional ownership, an important source of managerial oversight, we find that abnormal disclosure tone is informative of a firm's future earnings and cash flows when institutional ownership is high. This positive association between institutional ownership and informativeness of abnormal tone is stronger when there is an increase in quasi-indexer institutional ownership and the contemporaneous performance is negative. Collectively, the results highlight a more complex role for disclosure tone. Abnormal disclosure tone could be reflective of managerial sentiment and convey forward-looking information to investors in the presence of greater oversight over managerial actions.     

Regulation fair disclosure and the market’s reaction to analyst investment recommendation changes

Previous research has shown that affiliated analysts (those who are working for investment banks that underwrite securities for companies) have an incentive to provide optimistically biased recommendations from selective information they are given by the firm. In an effort to halt such activities, as of October 2000, Regulation Fair Disclosure (RegFD) prohibits selective disclosure of material non-public information by public companies to privileged individuals (such as favored research analysts) and requires broad, non-exclusionary disclosure of such information. We examine firms’ stock price reactions to investment recommendation changes from affiliated analysts versus unaffiliated analysts from October 1998 to November 2002, around the passage of RegFD. Similar to previous research, we find that investors reacted more significantly to recommendation downgrades by affiliated analysts than to those by unaffiliated analysts prior to the passage of RegFD. However, we find that the difference in the reactions to recommendation changes is not present after the passage of RegFD. We also find that stock price reactions to analysts’ (both affiliated and unaffiliated) recommendation changes decreased significantly after the passage of RegFD. Thus, RegFD appears to have curbed the selective disclosure of information (particularly negative information) by firms to affiliated analysts. Further, the smaller reactions to recommendation changes by all analysts after RegFD may reflect a change in analysts’ behavior (irrespective of information that is available) or a response by corporate managers to withhold information rather than risking a violation of fair disclosure rules.     

Sustaining implicit contracts when agents have career concerns: the role of information disclosure

Firms often augment career concerns incentives with implicit incentive contracts. I formalize the interaction between these two incentives, and highlight its implications on a firm's decision to disclose its workers' productivity information. Disclosure enhances career concerns but inhibits implicit contracts. I show two main results. First, implicit contracts weaken (i.e., substitute) career concerns if the prior belief about the worker's ability is low, and vice versa. Second, when these incentives are substitutes, the optimal disclosure policy follows a cutoff rule: patient firms are opaque, and transparent firms never offer implicit contracts. These results need not hold if the incentives are complements.     

Does the stock market affect firm investment in China? A price informativeness perspective

This paper investigates the empirical relationship between firm-level investment and the stock market in China from a price informativeness perspective. We find that firm investment does not significantly respond to the stock market valuation, because stock prices contain very little extra information about the future operating performance of firms. This finding is further supported by the relative investment response test and the relative price information content test based on the informativeness proxy of price non-synchronicity combined with firm information transparency.     

The level and quality of Value-at-Risk disclosure by commercial banks

In this paper we study both the level of Value-at-Risk (VaR) disclosure and the accuracy of the disclosed VaR figures for a sample of US and international commercial banks. To measure the level of VaR disclosures, we develop a VaR Disclosure Index that captures many different facets of market risk disclosure. Using panel data over the period 1996–2005, we find an overall upward trend in the quantity of information released to the public. We also find that Historical Simulation is by far the most popular VaR method. We assess the accuracy of VaR figures by studying the number of VaR exceedances and whether actual daily VaRs contain information about the volatility of subsequent trading revenues. Unlike the level of VaR disclosure, the quality of VaR disclosure shows no sign of improvement over time. We find that VaR computed using Historical Simulation contains very little information about future volatility.     

Word-of-mouth communication,noise-driven volatility,and public disclosure

This paper examines how a firm adjusts its disclosure quality in response to technological innovations that improve investors' private information. We show that more precise private information can endogenously amplify supply shocks and, hence, increase noise-driven (or non-fundamental) price volatility. We study how the firm reacts to such changes and derive a necessary and sufficient condition under which the firm improves its disclosure quality when investors are informed with better private signals. We then apply our model to study investors' private word-of-mouth communication. Our analysis highlights a “dark side” of word-of-mouth communication and a call for better public disclosure even if private communication is assumed to be unbiased and truthful. We provide empirical predictions regarding how price volatility, market depth, and firms’ disclosure qualities would change as technological innovations, such as social media, facilitate information sharing among investors.     

Does more information in stock price lead to greater or smaller idiosyncratic return volatility?

We investigate the relation between price informativeness and idiosyncratic return volatility in a multi-asset, multi-period noisy rational expectations equilibrium. We show that the relation between price informativeness and idiosyncratic return volatility is either U-shaped or negative. Using several price informativeness measures, we empirically document a U-shaped relation between price informativeness and idiosyncratic return volatility. Our study therefore reconciles the opposing views in the following two strands of literature: (1) the growing body of research showing that firms with more informative stock prices have greater idiosyncratic return volatility, and (2) the studies arguing that more information in price reduces idiosyncratic return volatility.     

Security Analysts’ Site Visits and Stock Price Synchronicity

This paper investigates how security analysts’ corporate site visits impact listed firms’ stock-price informativeness. Examining a sample of security analysts’ visits to Chinese listed firms from 2010 to 2019, we find that security analysts incorporate firm-specific information into share prices through site visits, significantly reducing the visited firms’ stock price synchronicity. This finding is robust to an alternative measure of stock price informativeness and a two-stage least-squares approach using the introduction of high-speed rail as the instrumental variable. We also find that the impact of analysts’ site visits on firms’ stock price synchronicity is more pronounced for firms with lower information disclosure quality and poor corporate governance than for other firms. Further analysis on firm characteristics documents that this effect is stronger for large-size firms, firms in the manufacturing industry, and state-owned enterprises.     

Does international cross-listing improve the information environment

We investigate whether cross-listing in the U.S. affects the information environment for non-U.S. stocks. Our findings suggest cross-listing has an asymmetric impact on stock price informativeness around the world, as measured by firm-specific stock return variation. Cross-listing improves price informativeness for developed market firms. For firms in emerging markets, however, cross-listing decreases price informativeness. The added analyst coverage associated with cross-listing likely explains the findings in emerging markets, rather than changes in liquidity, ownership, or accounting quality. Our results indicate that the added analyst coverage fosters the production of marketwide information, rather than firm-specific information.     

Equity home bias and corporate disclosure

I show that more comprehensive corporate disclosure reduces investors’ uncertainty about domestic companies’ payoffs at no cost, thereby decreasing investors’ equity home bias toward a country. Since investors should base their investment decisions on valid and easily interpretable company information only, more comprehensive disclosure will reduce the home bias only if domestic securities law is sufficiently stratified and domestic companies use international accounting standards. Using panel data for 38 countries from 2003 to 2008 I find that more comprehensive disclosure reduces investors’ home bias, though significantly only for countries that sufficiently enforce their securities law and implement international accounting standards.