Voluntary disclosure incentives: A study of the determinants of security analysts' disclosure scores

This research empirically examines a firm's incentives for discretionary disclosures. It contributes to existing literature in this area in three ways. First, instead of looking at the information content or accuracy of disclosures, management's motives and incentives for discretionary disclosures are identified and tested. Second, the hypotheses tested are drawn from recent theoretical literature in order to bridge the gap between theory and empirical findings. Third, overall disclosure scores, calculated by professional security analysts and reported annually for a sample of firms, are used as the measure of disclosure in this study. These scores capture information released voluntarily by firms in annual and quarterly reports, other public releases and directly to financial analysts. Thus, they provide a more comprehensive measure of disclosures as compared to some of the other measures used previously.; The results suggest that a firm's disclosure strategy is determined by both cost and benefit considerations. One potential benefit of disclosures is that it reduces a firm's cost of capital. Firms with higher disclosure scores are found to face a lower cost of debt and enjoy narrower bid-ask spreads. Moreover, firms in greater need for external financing are found to have higher disclosure scores. A second possible incentive for disclosures could be to reduce legal liability. Timely disclosures can reduce the risk of lawsuits typically filed by investors after large stock price decreases. The positive relationship between disclosures and institutional ownership observed here is consistent with the argument that these investors put more pressure on firms to disclose information than ordinary investors.; Possible costs of disclosures could be a reduction in management's information advantage. While no relationship between disclosures and insider trading was observed in this study, the strong negative association between the disclosure scores and the proportional stock ownership of the CEO suggest that large shareholders with inside information prefer to maintain their information advantage. Disclosure of proprietary information could also increase political costs in the form of threat of regulation or sanctions and reduce the firm's competitive edge in the industry. The results provide weak support of this argument.