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Costs and Benefits of Disclosure Changes
Chia - Chun Hsieh,
University of British Columbia
ABSTRACT. This paper examines the characteristics of firms that experience declines in disclosure quality. The paper shows that the disclosure-decreasing firms experienced decreased stock returns, increased bid-ask spreads and analyst forecast dispersions, on scales symmetric to the consequences of disclosure increases, while analyst coverage did not change significantly during the disclosure-decreasing period. Tests indicate that the interaction between capital demand and earnings performance is likely to affect disclosure changes, implying costs that prevent firms from disclosing more. This paper also finds that disclosure-decreasing firms face changes in circumstances since they report more income-decreasing nonrecurring earnings. Unusual events such as proxy battles also suggest the likely increase in overall uncertainty. The finding that the disclosure-decreasing firms issue public debt more frequently suggests that disclosure declines do not deter public debt financing.
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