A New Measure of Disclosure Quality: The Level of Disaggregation of Accounting Data in Annual Reports

TLDR

DQ differs from existing disclosure measures by capturing the fineness of data and relying on a comprehensive set of accounting line items in annual reports. The study constructs a new, parsimonious measure of disclosure quality—disaggregation quality (DQ)—and proposes validation tests. DQ is defined as the count of nonmissing Compustat line items, reflecting detail in annual reports, and is applicable to all Compustat industrial firms; the authors validate it through three sets of tests linking DQ to variables associated with information quality. DQ is negatively associated with analyst forecast dispersion, positively with forecast accuracy, and negatively with bid‑ask spreads and cost of equity, and these relationships persist after controlling for firm fundamentals, supporting DQ as a measure of disclosure quality.

Abstract

ABSTRACT We construct a new, parsimonious, measure of disclosure quality—disaggregation quality (DQ)—and offer validation tests. DQ captures the level of disaggregation of accounting data through a count of nonmissing Compustat line items, and reflects the extent of details in firms’ annual reports. Conceptually, DQ differs from existing disclosure measures in that it captures the “fineness” of data and is based on a comprehensive set of accounting line items in annual reports. Unlike existing measures, which are usually applicable for a subset of firms or are based on a subset of information items, DQ can be generated for the universe of Compustat industrial firms. We conduct three sets of validation tests by examining DQ's association with variables predicted by prior literature to be associated with information quality. DQ is negatively (positively) associated with analyst forecast dispersion (accuracy) and negatively associated with bid‐ask spreads and cost of equity. These associations continue to hold after we control for firm fundamentals. Taken together, results from this battery of validation tests are consistent with our measure capturing disclosure quality.