Measuring the Mapping Between Disclosures and the Information Environment: A Data Envelopment Analysis Approach
65 Pages Posted: 16 Apr 2020 Last revised: 31 Aug 2021
Date Written: August 30, 2021
Existing research finds evidence in favor of a bidirectional causal relation between disclosure and features of the firm’s information environment, such that disclosure is both a determinant and an outcome of a firm’s information environment. Building on this idea, we use data envelopment analysis (DEA) to develop measures of the mapping between a firm’s portfolio of disclosures and the quality of the firm’s information environment. This approach shows that disclosure mapping scores vary predictably across firms based on sources of disclosure costs and display substantial persistence across time, consistent with enduring features of the operating environment determining firms’ disclosure strategies. Using these disclosure mapping scores, we examine whether unexpected shifts in the information environment from sources external to the firm, such as a loss of analyst coverage due to a brokerage closure, result in transitory or more permanent shifts in the firm-level mapping between disclosures and the information environment. Evidence from these tests suggests that firms dynamically adjust their disclosure portfolios toward a target mapping between disclosures and the information environment in response to events that move firms away from their target.
Keywords: data envelopment analysis, voluntary disclosure, mandatory disclosure, broker closure, litigation, target adjustment, proprietary disclosure costs
JEL Classification: D24, M4
Suggested Citation: Suggested Citation