Disclosure Similarity and Future Stock Return Comovement

Existing research often assumes that firms’ financial reporting choices influence their return comovement with other firms. We examine the validity of that assumption. First, we provide initial evidence suggesting that similarity in two firms’ disclosures not only predicts, but influences, future return comovement between those two firms. Second, we show that this predictive ability aggregates to the market level; disclosure similarity can be used to estimate more accurate forward-looking market betas. Taken together, these two results imply that managers can influence their firms’ betas by altering their firms’ disclosures – a prominent assumption in existing research, but one with little empirical support until now