A Cross-Sectional Analysis of the Theory of Corporate Disclosure Due to Adverse Selection

In this paper we examine the determinants of firms’ level of voluntary disclosure. We use analysts’ published evaluations of firms’ disclosures as a comprehensive measure of disclosure level and use a model of discretionary disclosure to explain cross-sectional variation in this measure. We provide evidence that firms’ disclosure levels are 1) increasing in past, current and future performance as measured by a variety of earnings and return variables, 2) increasing in firm size and decreasing in the volatility of past performance and in the correlation between earnings and returns, and 3) higher for firms issuing securities in the current or future period. In general, the results are consistent with the predictions of the model.