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

Posted: 7 Mar 2016

See all articles by Shuping Chen

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

Bin Miao

Shanghai University of Finance and Economics - School of Economics

Terry J. Shevlin

University of California-Irvine

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 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 nonmissing 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) and 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 (December 1, 2015). Journal of Accounting Research, Vol. 53, No. 5, 2015. Available at SSRN: https://ssrn.com/abstract=2741777

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

Shanghai University of Finance and Economics - School of Economics ( email )

777 Guoding Road
Shanghai, 200433
China

Terry J. Shevlin

University of California-Irvine ( email )

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

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