Do Firms Provide Informative Disclosures in An Environment of Extreme Uncertainty? Evidence from the COVID-19 Pandemic

Do firms provide informative disclosures in an environment of extreme uncertainty? We study this research question by examining corporate disclosures during the initial stage of the COVID-19 pandemic, i.e., the first quarter of 2020. During this period, firms had to respond to an unprecedented crisis with little prior experience or guidance from regulators. We find that COVID-19 disclosures in annual reports (10-K forms) appeared to have been informative to investors. Our market reaction tests show that investors found these early COVID-19 disclosures useful. Using two measures of disclosure quality derived from unsupervised machine learning, we find that the market reacted more strongly to COVID-19 disclosures that were more firm-specific in addressing the market demand of COVID-19 information. Understanding firms’ disclosure behavior in an environment of extreme uncertainty has important policy implications and may inform securities regulators on the role it should play in similar situations as the SEC transitions to a more principles-based approach towards disclosure regulation