Measuring Disclosure Investment Strategy : A Data Envelopment Analysis Approach

This paper develops a measure of disclosure investment strategy using data envelopment analysis (DEA) to apply a production formulation to firms' investments in mandatory and voluntary disclosures. Conceptually, the “disclosure production” of a firm consists of a variety of disclosure choices (as the production inputs) corresponding to a variety of outcomes of disclosure (as the production outputs). In our setting, the primary advantage of DEA is that it allows us to incorporate multiple disclosure inputs in the estimation (e.g., press releases, earnings forecasts), allowing firms to select a portfolio of disclosures that maximizes the aggregate benefits of those disclosures on their information environment. We find that the resulting measures of disclosure investment strategy vary predictably with proxies for both costs and benefits of disclosure and yield new evidence on variation in disclosure investments around changes in proprietary costs and securities class action lawsuits