Disclosure Standards and Market Efficiency: Evidence from Analysts' Forecasts

Posted: 30 Dec 2004

See all articles by Hui Tong

Hui Tong

International Monetary Fund (IMF)

Date Written: March 8, 2004


Since the Mexican and Asian crises, there has been a proliferation of international initiatives, including an ambitious standard-setting agenda, to encourage banks, firms and governments to disclose more information about their financial affairs. This paper studies whether and how such transparency standards affect information accuracy and dispersion. I show that the impact of transparency initiatives may be more limited than often thought to the extent that public disclosure crowds out private investments in information. I first develop a theoretical model of the incentive to invest in information and the impact of public disclosure. I then analyze a panel data set of stock market analysts' forecasts for sixty countries for the period 1990-2002. I find that disclosure standards enhance forecast accuracy directly but at the same time reduce the number of analysts per stock (the variable that serves as my proxy for private investments in information). The net effect of disclosure standards on forecast accuracy and dispersion thus ranges from weak to nonexistent. The implication is that studies that fail to analyze this crowding out effect may exaggerate the impact of disclosure standards on market outcomes.

Suggested Citation

Tong, Hui, Disclosure Standards and Market Efficiency: Evidence from Analysts' Forecasts (March 8, 2004). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=641842

Hui Tong (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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