Cross-Sectional Determinants of Analyst Ratings of Corporate Disclosures

TLDR

SEC disclosure rules set a minimum, but firms vary widely in the amount and detail of information they provide, from extensive reports to minimal filings, with additional discretion from press releases and analyst contacts, all of which analysts compile in their reports. The study investigates how analysts’ ratings of disclosure practices vary across firms, testing whether ratings rise with firm size and performance, fall with earnings–return correlation, and are higher for firms issuing securities. Analyst ratings are higher for larger, better‑performing firms, lower when earnings and returns are highly correlated, and increase for firms issuing securities, though the impact of past performance volatility is mixed.

Abstract

In this paper we examine cross-sectional variation in analysts' published evaluations of firms' disclosure practices and provide evidence that the analysts' ratings are increasing in firm size and in firm performance as measured by earnings and return variables, decreasing in the correlation between earnings and returns, and higher for firms issuing securities in the current or future period. Results based on the volatility of past performance are mixed. While the SEC's mandatory disclosure requirements provide a basic framework and minimum standard for many financial disclosures, considerable latitude remains in determining what information is actually provided. Some firms' annual and quarterly reports go well beyond the required disclosures, while others are extremely stark. Less formal communication channels, such as press releases and direct contact with analysts, allow even more discretion. This wide range of disclosure alternatives is aggregated by analysts in the Reports of the Financial Analysts