Measuring the information content of disclosures: The role of return noise

The Accounting Review https://doi.org/10.2308/TAR-2021-0075

Posted: 29 Jun 2018 Last revised: 15 Feb 2022

See all articles by Jacob K. Thomas

Jacob K. Thomas

Yale School of Management

Frank Zhang

Yale School of Management

Wei Zhu

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: January 31, 2022

Abstract

Disclosure is of fundamental interest to accounting research. When the sign/magnitude of disclosed news is unclear, the information in disclosure events is inferred using the ratio of return volatilities during event and non-event windows (Beaver 1968). We show that return noise due to microstructure frictions and mispricing affects this ratio and that effect is comparable to or exceeds that of information content. We use the SEC’s Tick Size Pilot program to confirm the causal effect of return noise on the ratio, and to evaluate alternative ways to control for it. The most promising approach is to use the difference between, rather than the ratio of, return volatilities during event and non-event windows. We illustrate its benefits by showing how it alters prior inferences regarding time-series and cross-sectional variation in information content as well as changes in the information content of earnings announcements around the 2004 amendments to Form 8-K filings.

Keywords: Return noise; return volatility; information content; U-statistic

JEL Classification: G14, M40, M41

Suggested Citation

Thomas, Jacob and Zhang, Frank and Zhu, Wei, Measuring the information content of disclosures: The role of return noise (January 31, 2022). The Accounting Review https://doi.org/10.2308/TAR-2021-0075, Available at SSRN: https://ssrn.com/abstract=3197745 or http://dx.doi.org/10.2139/ssrn.3197745

Jacob Thomas

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Frank Zhang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Wei Zhu (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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