Review of Accounting Studies, 7, 33–52, 2002
2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
Corporate Disclosure Policy and the Informativeness
of Stock Prices
DAVID S. GELB
Seton Hall University
New York University
Abstract. We examine the association between voluntary corporate disclosure and the informativeness of stock
prices. We measure corporate disclosure using the AIMR-FAF annual corporate disclosure ratings. We deﬁne
price informativeness by the association between current stock returns and future earnings changes: more infor-
mative stock price changes contain more information about future earnings changes. To measure this association,
we regress current returns against (current and) future earnings changes. The aggregated coefﬁcient on the future
earnings changes, which we refer to as the future ERC, is our measure of informativeness (association).
We hypothesize and ﬁnd that greater disclosure is associated with stock prices that are more informative about
future earnings (i.e., higher future ERC). These results provide empirical support for the widely held, but heretofore
empirically undocumented, belief that greater disclosure provides information beneﬁts to investors.
Keywords: disclosure, future ERC, informativeness
JEL Classiﬁcation: G14, M41
In this paper, we examine the association between the level of voluntary corporate
disclosure and the informativeness of stock prices. We measure corporate disclosure
using the annual AIMR-FAF (Association for Investment Management Research-Financial
Analysts Federation, hereafter FAF) corporate disclosure ratings. We deﬁne price infor-
mativeness by the association between current stock returns and future earnings changes
(controlling for current earnings changes): more informative stock price changes contain
more information about future earnings changes. To measure this association, we regress
current returns against both current and future earnings changes. The aggregated coefﬁ-
cients on the future earnings changes is our measure of informativeness (association). We
refer to this measure as the future ERC.
To implement our tests, we construct a sample of ﬁrms ranked high vs low on their
FAF disclosure scores within their industry (top vs bottom quartile in their industry for two
consecutive years). Combining ﬁrms by industry enables us to isolate the effect of disclosure
on informativeness, because it controls for the accounting and real business factors that affect
the relation between current returns and future earnings (i.e., earnings’ intrinsic timeliness
and forecastability). Controlling for these factors is important, because we want to minimize
the possibility that any relation we ﬁnd between the level of disclosure and informativeness
Corresponding address: Paul Zarowin, New York University, Stern School of Business, 422 Tisch Hall, 40 West
4th Street, New York, NY 10012.