Investor Protection and Post-Disclosure Disagreement: International Evidence

SynopsisThe research problemAdding to the literature on investor protection, this study investigates whether nationwide institutional features may explain cross-country variation in post-disclosure disagreement.MotivationPrevious research has revealed that the release of financial statements aggravates investor disagreement rather than attenuating it. However, most studies only obtain empirical evidence in the context of the United States; no work has examined this research question in an international setting. Another motivation for this paper is the attempt to understand the contradiction in the literature, which emphasizes micro-level determinants. By contrast, minimal attention has been paid to the macro-level institutional factors of a country’s information environment, which presumably prompts investors to shape heterogeneous beliefs.The test hypothesesH1: Countries with greater corporate transparency are associated with a lower level of post-disclosure investor disagreement.H2: Countries with stronger legal protection are associated with a lower level of post-disclosure investor disagreement.Target populationVarious stakeholders include firm managers, financial analysts, regulatory watchdogs, and users of earnings reports.Adopted methodologyOrdinary Least Squares (OLS) RegressionsAnalysesGao et al. (2012) to measure investor disagreement while we quantify corporate transparency (legal protection) by extracting the first principal component of nine countrywide characteristics pertinent to disclosure requirements (legal systems). Using a global sample from 38 countries, we perform a cross-sectional regression of post-disclosure disagreement on two proxies for investor protection after accounting for firm-specific control variables.FindingsWe find clear evidence of post-disclosure disagreement in all countries. Next, we document a negative relationship between corporate transparency (legal protection) and post-disclosure disagreement. Additional tests confirm that both better disclosures and strong regulations enhance information precision, accelerate information dissemination, and reduce informed trading, thus leading to a lower level of post-disclosure disagreement.