EFFECTS OF FIRM DISCLOSURE ACTIVITY ON THE RETURNS-EARNINGS RELATION IN SINGAPORE

Abstract

This study examines the effects of firm disclosure activity on the returns-earnings relation in Singapore. Lundholm and Myers (2002) note that current annual stock returns reflect more “future earnings news” when firms provide more informative disclosures, without a decline in the relevance of current earnings. My analysis extends the current return–future earnings specification from Lundholm and Myers (2002), and proxies for firm disclosure activity by using both the frequency of financial reporting and the Governance & Transparency Index (GTI) scores. This paper makes a few key findings. Firstly, I find some evidence on the relation between the frequency of financial reporting and the amount of future earnings news incorporated into current annual return. Secondly, the relevance of current earnings is positively associated with firm reporting frequency. Thirdly, the GTI score allows current returns to be more reflective of current earnings news, but its relationship with future earnings news is less evident. Fourthly, the ‘Communication with Shareholders’ component is the most useful of the three components of the GTI score in revealing more current and future earnings news, which is then incorporated into current returns. Taken as a whole, increasing firm disclosure activity is likely to lead to an increased association between current returns with current and future earnings. Findings suggest that mandatory quarterly reporting rules and increasing corporate governance and transparency standards across firms provide benefits of revealing more information about current and future earnings to shareholders.