Voluntary Disclosure Quality and Equity Prices

This paper investigates the extent to which voluntary disclosure quality (VDQ) of firms isreflected in equity prices. In environments where we expect informational efficiency to behigh, VDQ is not associated with returns beyond those available through passively investingin popular styles, and a standard two-stage cross-sectional approach also suggests that VDQ isnot a priced risk factor. By contrast, among small firms, those with little analyst coverage,and those not widely covered in the media, firms with the highest VDQ deliver the greatestrisk-adjusted excess returns. This is consistent with the notion that for these relatively opaquefirms, today’s equity prices do not incorporate all information and that value reportingprovides benefits, for example, by allowing more efficient internal capital deployment.