When and How is Voluntary Disclosure Quality Reflected in Equity Prices?

This paper explores the idea that the speed with which equity prices reflect any benefits or costs of voluntary disclosure quality (VDQ) varies across firms. We find that for firms where we expect informational efficiency to be high, VDQ is not associated with returns beyond those available through passively investing in popular styles and is not a priced risk factor. By contrast, among opaque firms (such as those with little analyst coverage), those with higher VDQ achieve higher risk-adjusted excess returns. They also have better operating performance. This result suggests that for these firms value reporting provides net benefits, but today’s equity prices do not yet incorporate this information. We discuss the relation of this finding to existing evidence from another sample that in firms with little analyst coverage higher VDQ is correlated with lower implied cost of equity.