Disclosure Quality, Price Efficiency, and Expected Returns

Abstract

Using the information rating consisting of disclosure items from five dimensions – regulatory compliance, timeliness, financial forecast, annual report, and corporate website, we examine how a firm’s disclosure quality influences its stock’s price efficiency and expected return in Taiwan stock market. We find the stock of a firm with better disclosure quality reflects both market-wide and firm-specific news more efficiently after controlling investor attention and stock liquidity variables. Furthermore, the component of information rating which is associated with outside governance, inside governance, and turnover of the important position variables also negatively correlates with a firm’s stock price delay. Finally, our findings show that the governance-determined information rating component of stock price delay significantly and positively explains stock returns in the following year, suggesting a negative relationship between a firm’s cost of equity capital and its governance-determined disclosure quality.