Essays on Mandatory and Voluntary Disclosure: The Stock Market

My dissertation examines the stock market’s assessment of corporate mandatory and voluntary disclosure. Specifically, the first part of the dissertation investigates the stock market reaction to the mandatory segment reporting changes and the second part studies how the stock market assesses credibility of voluntary management forecasts. The dissertation is composed of two essays. The first essay examines the impact of SFAS 131 on the extent to which stock prices incorporate industry-wide and firmspecific components of future earnings. By decomposing earnings into industry-wide and firm-specific components, this paper finds that the stock market had difficulty in predicting industry-related earnings for firms that aggregated segments under the previous standards. These firms experience significant acceleration in the incorporation of future earnings into current stock prices upon adoption of SFAS 131. However, the acceleration of future earnings is mostly driven by the improved incorporation of industry-wide components of future earnings, which indicates that the market’s ability to predict firm-specific components is not significantly changed. Supplemental analysis documents that firms that increased business segment disclosure tend to reduce geographic disclosure more than firms that are not affected by SFAS 131, suggesting that the reduced geographic earnings information is one possible reason for lack of improvement in incorporating firm-specific earnings into price. The second essay examines the relation between a series of past earnings increases and the credibility of voluntary management earnings forecasts. Specifically, using strings of increasing earnings per share as our measure of past performance, we demonstrate that both analyst forecast revisions and stock price reactions around