The Effects of Voluntary Disclosure and Dividend Propensity on Prices Leading Earnings

We investigate the joint effects of dividend propensity (i.e. whether a firm pays cash dividends) and voluntary disclosure on the relationship between current stock returns and future earnings. We examine whether dividend propensity and voluntary disclosure act as substitutes or complements in the financial communication process. We also examine whether the effects of dividend propensity and voluntary disclosure vary between high- and lowgrowth firms. Consistent with prior studies, we find that share price anticipation of earnings improves with increasing levels of annual report narrative disclosure, and that firms that pay dividends exhibit higher levels of share price anticipation of earnings than non-dividend-paying firms. The paper adds to the literature on share price anticipation of earnings in two crucial respects. First we show that the associations of voluntary disclosure and dividend propensity with share price anticipation of earnings are statistically significant for high-growth firms and insignificant for low-growth firms. Second we show that the significanteffects we find for dividend propensity and voluntary disclosure in high-growth firms are not perfectly additive.