Measuring the Information Content of Accounting Disclosures

64 Pages Posted: 29 Jun 2018 Last revised: 7 Aug 2019

See all articles by Jacob K. Thomas

Jacob K. Thomas

Yale School of Management

Frank Zhang

Yale School of Management

Wei Zhu

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: July 26, 2019

Abstract

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

Thomas, Jacob Kandathil and Zhang, Frank and Zhu, Wei, Measuring the Information Content of Accounting Disclosures (July 26, 2019). Available at SSRN: https://ssrn.com/abstract=3197745 or http://dx.doi.org/10.2139/ssrn.3197745

Jacob Kandathil Thomas

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Frank Zhang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Wei Zhu (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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