A New Measure of Disclosure Quality: The Level of Disaggregation of Accounting Data in Annual Reports

62 Pages Posted: 4 Aug 2014 Last revised: 27 Aug 2015

See all articles by Shuping Chen

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

Bin Miao

National University of Singapore

Terry J. Shevlin

University of California-Irvine

Multiple version iconThere are 2 versions of this paper

Date Written: August 26, 2015

Abstract

We construct a new, parsimonious, measure of disclosure quality – disaggregation quality (DQ) – and offer validation tests. DQ captures the level of disaggregation of accounting data through a count of non-missing Compustat line items, and reflects the extent of details in firms’ annual reports. Conceptually DQ differs from existing disclosure measures in that it captures the ‘fineness’ of data and is based on a comprehensive set of accounting line items in annual reports. Unlike existing measures which are usually applicable for a subset of firms or are based on a subset of information items, DQ can be generated for the universe of Compustat industrial firms. We conduct three sets of validation tests by examining DQ’s association with variables predicted by prior literature to be associated with information quality. DQ is negatively (positively) associated with analyst forecast dispersion (accuracy), negatively associated with bid-ask spreads and cost of equity. These associations continue to hold after we control for firm fundamentals. Taken together, results from this battery of validation tests are consistent with our measure capturing disclosure quality.

Keywords: disclosure quality, disaggregation of data items, annual reports, Compustat

JEL Classification: M41, D83

Suggested Citation

Chen, Shuping and Miao, Bin and Shevlin, Terry J., A New Measure of Disclosure Quality: The Level of Disaggregation of Accounting Data in Annual Reports (August 26, 2015). Available at SSRN: https://ssrn.com/abstract=2475624 or http://dx.doi.org/10.2139/ssrn.2475624

Shuping Chen (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
521.471.5328 (Phone)

Bin Miao

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 119245
Singapore

Terry J. Shevlin

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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