Financial Reporting Quality and Investors' Divergence of Opinion*

Abstract

ABSTRACTThe main purpose of this study is to analyze the association of financial reporting quality and investors' divergence of opinion. We focus on UK firms listed on the London Stock Exchange. Divergence of opinion is measured by two proxies based on unexpected trading volume and by dispersion in analysts' forecasts made one and two years ahead. Previous literature shows that the amount of firms' disclosure is negatively associated with the dispersion in analysts' forecasts. The results obtained in our study show that the quality of the disclosure is negatively associated with divergence of opinion, whether it is proxied by measures of unexpected trading volume or dispersion in analysts' forecasts. Financial reporting quality affects divergence of opinion not only in the months that immediately follow the disclosure of the reports but in the whole year that follows.