Corporate Disclosure, Market Valuation, and Firm Performance

Abstract

Quality of mandatory and voluntary disclosures varies substantially across firms. In this paper, we study the relationship between the Association for Investment Management and Research (AIMR) disclosure rankings and several performance measures during 1982 to 1996. We find a positive relation between these rankings and stock returns, and this relation is more pronounced for rankings on voluntary disclosures than for those on mandatory disclosures. Furthermore, disclosure rankings are highly correlated with firm value: firms ranked at the top have Qs that are 35 percent higher than those ranked at the bottom. We also find positive associations between disclosure rankings and future net profit margins, sales growth, and R&D intensity. Finally, we show that changes in disclosure rankings are positively related to future earnings surprises. Overall, our findings suggest that high quality disclosures (at least partially) reflect managers' genuine efforts to communicate favorable private information about future performance to investors, and can reduce misvaluation and short-run market pressures.