A New Measure of Disclosure Quality

We construct a new, parsimonious, measure of disclosure quality (DQ) and offer validation tests. DQ is based on the level of disaggregation of financial data based on all Compustat line items, and captures the extent of details in firms' annual reports. DQ differs from all existing disclosure measures in that it is based on a comprehensive set of accounting data in annual reports, and can be generated for the universe of Compustat industrial firms. We conduct five sets of validation tests, by examining DQ's association with established proxies of information quality and established predictors of disclosure quality. We find that DQ is negatively (positively) associated with analyst forecast dispersion (accuracy) and negatively associated with bid-ask spread and cost of capital. We also find that the return volatility surrounding the 10-K filing dates to be lower for firms with higher DQs. DQ is also systematically associated with established determinants of disclosure quality in a predictable manner. Taken together, results from this battery of validation tests are consistent with our measure capturing disclosure quality.