Measuring the Information Content of Accounting Disclosures
64 Pages Posted: 29 Jun 2018 Last revised: 7 Aug 2019
Date Written: July 26, 2019
Accounting research studies the impact of disclosure on different stakeholders, and relies on the ratio measure in Beaver (1968) to assess information content when the news disclosed is not easily determined. Variation in this ratio of return volatilities during disclosure event to non-event windows reflects variation in disclosure-related information. We develop a framework to show how the ratio also reflects variation in microstructure noise, normal information arrival, and mispricing, and suggest empirical proxies for these other determinants. To validate our framework, we exploit two plausibly exogenous shocks to microstructure noise and normal information arrival—the SEC’s Tick Size Pilot program and the 2004 amendments to Form 8-K filings. We also reexamine some prior results to show how inferences change when the ratio varies because of these other determinants. More generally, our framework and empirical proxies allow a more comprehensive understanding of the ways in which disclosure affects markets.
Keywords: U-statistic; earnings announcements; information content; return volatility
JEL Classification: G14, M40, M41
Suggested Citation: Suggested Citation