An Empirical Examination of the Commitment to Increased Disclosure

Abstract

I examine the relation between a corporate commitment to increased disclosure and measures of liquidity, information asymmetry, and cost of equity capital. Relative to prior research on voluntary disclosure, I use a composite, ex ante measure of commitment based in social psychology and measure commitment using characteristics of earnings announcement disclosures. Prior to Regulation Fair Disclosure (Reg FD) I find that commitment to increased disclosure is negatively related to bid-ask spreads, probability of informed trade (PIN) scores, and implied cost of capital estimates. Further analysis reveals that the disclosure of balance sheet information in earnings releases is significantly related to spreads and PINs, regardless of firms' conference call behavior, while the combination of consistent open calls and disclosure of balance sheet information in earnings releases yields the most significant results for cost of capital. After the effective date of Reg FD I find that commitment is negatively related to PIN scores and implied cost of capital estimates, but not related to bid-ask spreads. Further analysis reveals that the disclosure of balance sheet information in earnings releases is significantly related to PINs and cost of capital, regardless of firms' conference call behavior.