Disclosure quality and stock returns in the UK

Hussainey, Khaled and Mouselli, S (2010) Disclosure quality and stock returns in the UK. Journal of Applied Accounting Research, 11 (2). pp. 154-174. doi:10.1108/09675421011069513

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Purpose – The purpose of this paper is to update and re‐examine the role of corporate narrative reporting in improving investors' ability to better forecast future earnings change. The paper also aims to construct a risk factor for disclosure quality (DQ) and test whether such a factor is useful in explaining the time‐series variation of UK stock returns. Design/methodology/approach – The paper uses the return‐future earnings regression model to update and re‐examine the value relevance of DQ for investors. It also constructs a DQ factor and adds it to Fama‐French three‐factor model. This is undertaken in order to investigate the usefulness of such a factor in explaining the time‐series variation of UK portfolio returns over and above the role of the original Fama‐French factors. Findings – The paper contributes to the market‐based accounting research in three crucial ways. First, it offers updated evidence on the usefulness of corporate narrative reporting to investors. Second, it offers evidence that the DQ factor is a significant risk factor in the UK. Third, and finally, it finds that the Fama‐French factors might contain DQ‐related information. Practical implications – The results suggest that narrative reporting contains value‐relevant information for the stock market. Therefore, regulators should think about asking companies to produce compulsory narrative sections (i.e. operating and financial reviews) in their annual reports. Originality/value – To the best of the authors' knowledge, this paper is the first to construct and add the DQ factor in the original Fama‐French factors.

Item Type: Article
Article Type: Article
Uncontrolled Keywords: Narratives, Disclosure, Stock returns, United Kingdom
Subjects: H Social Sciences > HF Commerce > HF5001 Business > HF5601 Accounting. Bookkeeping
H Social Sciences > HG Finance
H Social Sciences > HG Finance > HG4001 Finance management. Business finance
Divisions: Schools and Research Institutes > School of Business, Computing and Social Sciences
Research Priority Areas: Applied Business & Technology
Depositing User: Ineke Tijsma
Date Deposited: 31 Mar 2015 13:28
Last Modified: 07 Aug 2023 13:28
URI: https://eprints.glos.ac.uk/id/eprint/1562

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