Disclosure Similarity and Future Stock Return Comovement

Abstract

Existing research often assumes that firms’ financial reporting choices influence their return comovement with other firms. We examine the validity of that assumption. First, we provide initial evidence suggesting that similarity in two firms’ disclosures not only predicts, but influences, future return comovement between those two firms. Second, we show that this predictive ability aggregates to the market level; disclosure similarity can be used to estimate more accurate forwardlooking market betas. Taken together, these two results suggest that firms’ reporting decisions can influence their firms’ betas even in the absence of changes to capital structure or operations.

Keywords: Return Comovement; Disclosure Similarity; Textual Analysis; Beta;

JEL Classification: G10; G11; M40; M41; D83; C5;