Disclosure Quantity and the Efficiency of Price Discovery: Evidence from the Toronto Stock Exchange

Abstract

The purpose of this paper is to investigate the effect of the information disclosure quantity on the pricing efficiency of stocks. Using a sample of large and actively traded Canadian companies listed on the Toronto Stock Exchange, the authors utilize annual reports filed on system for electronic document analysis and retrieval (SEDAR) between 2003 and 2013 to estimate the amount of publicly available information and find that the length and size of annual reports are important determinants of short-horizon return predictability from historical order flows, which is an inverse indicator of market efficiency. The results show that longer and larger annual reports are associated with reduced information asymmetry, lower cost of immediacy, higher trading activity, and an overall improvement in the efficiency of price discovery. The results are robust to the inclusion of controls for various determinants of short-horizon return predictability, such as trading costs, volatility, informational effects and other firm-specific characteristics. Collectively, the findings provide empirical support for the benefits of detailed corporate disclosure in Canada.

Keywords: Market Efficiency, Disclosure Quantity, TSX

JEL Classification: G12, G14