Corporate Information Environment Dynamics and Equity Valuation An Analysis of Mandatory disclosures, Voluntary disclosures, and Information Intermediaries Open Access

Zhao, Jingran (2015)

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This paper examines the dynamics of a firm's information environment and how the components of the firm's information environment affect equity valuation of the firm. I examine the dynamics of a firm's information environment by investigating the relations among mandatory disclosures (ManDisc), voluntary disclosures (VolDisc), and information generated by information intermediaries (InfoInt). I find that firms with superior ManDisc also have superior VolDisc and superior InfoInt. The positive correlations between the three information channels suggest they are complementary in communicating to investors. I then examine the impact of the three information channels on equity valuation. Specifically, I examine the impact of each information channel on the stock price deviation from the firm's fundamental value, as calculated by the residual income valuation model. In the unconditional tests, I find that all three information channels affect equity valuation. However, in the conditional tests, I find that the disclosure effect of ManDisc on equity valuation disappears when I control for VolDisc and InfoInt. This evidence cautions against drawing inferences exclusively from the evidence of relations between equity valuation and one information channel. All three information channels contribute to a firm's overall information environment.

Table of Contents

1. Introduction. 1

2. Hypothesis Development. 9

2.1 Relations Between Information Channels. 9

2.2 Information Environment and Equity Valuation. 10

3 Sample Description. 12

3.1 Sample Selection. 12

3.2 Information Environment Measures. 13

3.2.1 Mandatory disclosures Variables. 14

3.2.2 Voluntary disclosures Variables. 16

3.2.3 Information Intermediaries Variables. 18

4 Results. 19

4.1Descriptive Statistics and Relations between the Information Channels. 19

4.2 Information Environment & Equity Valuation. 21

4.3 Information Environment & Future Stock Returns. 25

4.4 Changes of Information Environment & Changes of Price Deviation. 28

4.5 Robustness Tests. 28

4.5.1 Financial Multiple: FScore. 28

4.5.2 Effect of Size. 30

4.5.3 Time-Series of the Trading Strategy. 30

4.5.4 Subsequent Earnings Accouchement Reactions. 31

5 Conclusion. 32

Appendix A: Implementation of Ohlson's Model (1995). 35

References. 37

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