Corporate Sales, Predisclosure Information and Return Variability

This paper investigates the determinants of return variability between accounting report and non-report periods. A model of information dissemination in financial markets is developed which shows that if corporate sales activity is a source of predisclosure information, the ratio of return variability between accounting report and non-report periods decreases in contribution margin per dollar sales. Greater contribution margin increases that portion of cash flow variability which is predictable by investors' observation of sales activity and, therefore, contribution margin indexes the informativeness of sales-related predisclosure information. Greater informativeness increases return variability in the predisclosure period relative to the accounting report period. Supporting evidence for this prediction is presented.