Disclosure policy choice, stock returns and information asymmetry: Evidence from capital expenditure announcements

Abstract

This article investigates whether firms commit ex-ante to higher levels of investment transparency and the impact of transparency on stock returns and information asymmetry. We construct a novel measure of investment transparency based upon the extensiveness of profitability forecasts and cost disclosures in new project-level capital investment announcements. Using cross-sectional regression, we find that prior to announcement greater investment transparency is associated with lower information asymmetry. We further show that rather than reporting information strategically on a project-by-project basis, managers commit ex-ante to a disclosure policy that influences the disclosure level of new project announcements, and that a firm-level commitment to fuller disclosure reduces information asymmetry in the days surrounding the announcement. Using event study methodology, we also find that investors react more positively to announcements displaying greater investment transparency. JEL Classification: G14, D83, G31, G30, G38