The informativeness of price-level adjusted accounting disclosures

Abstract

The primary purpose of this study is to investigate the variability of stock prices at the release of inflation-adjusted information disclosures relating to ASR No. 190. Theory suggests that price variability at the release of information is associated with the “informativeness” of that information. The hypotheses are constructed to examine whether inflation disclosures led to certain hypothesized changes in the information environment. Several different metrics are used to measure the variability of stock returns. The empirical results, based on daily, cumulative, and ratio-based analyses using relative stock returns variability metrics, indicate that the Securities and Exchange Commission's(SEC) mandated inflation-adjusted data are associated with increased stock returns variability. In addition, this finding is shown to be robust in the post-disclosure environment. Evidence also indicates that the increased stock returns variability is applicable to medium and large firms but not for small firms. The different behavior between large-medium firms and small firms may partially explain why previous studies failed to detect information content for the inflation-adjusted data. Interindustry analysis of the information content of the inflation data is also conducted. This evidence suggests that the informativeness of inflation-adjusted information differs across industries, and that these differences are not solely attributed to varying rates of inflation. The results of this study give some insight into how market participants react to policy changes relating to inflation-adjusted accounting information and how the required disclosures affect the information environment.