Corporate Disclosure Policy and the Informativeness of Stock Prices

New York University, Stern School of Business

30 Pages Posted: 22 Aug 2000

See all articles by David Gelb

David Gelb

Seton Hall University - Accounting

Paul Zarowin

New York University (NYU) - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: June 2000

Abstract

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 use the multiple regression model of Collins, Kothari, Shanken, and Sloan (1994), wherein current returns are regressed against both current and future earnings changes and future stock returns. The aggregated coefficients on the future earnings changes, which we refer to as the future ERC, is our measure of infomativeness (association).

We hypothesize and find that greater disclosure is associated with greater price informativeness (i.e., higher future ERC). This is the first empirical evidence that enhanced disclosure results in stock prices that are more informative about future earnings, indicating that greater disclosure provides information benefits to the stock market.

In addition, the method we use to document the benefits of enhanced voluntary disclosure can be applied in other cases of interest to both academics and policymakers, such as assessing the benefits of additional required disclosures.

Key Words: Voluntary disclosure

JEL Classification: G14, M41, M45

Suggested Citation

Gelb, David S. and Zarowin, Paul, Corporate Disclosure Policy and the Informativeness of Stock Prices (June 2000). New York University, Stern School of Business. Available at SSRN: https://ssrn.com/abstract=235009 or http://dx.doi.org/10.2139/ssrn.235009

David S. Gelb

Seton Hall University - Accounting ( email )

400 South Orange Avenue
South Orange, NJ 07079
United States
973-761-9235 (Phone)
973-761-9217 (Fax)

Paul Zarowin (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
422 Tisch Hall
New York, NY 10012-1118
United States
212-998-0015 (Phone)
212-995-4004 (Fax)

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