Disclosure Risk and Price Drift

Authors


  • Earlier versions of this paper were circulated under the title “Endogenous Disclosures and the Post-Earnings Announcement Drift.” I am indebted to many colleagues for their comments and advice. Ray Ball, Ron Dye, Chandra Kanodia, Han Ozsoylev, Haresh Sapra, Sri Sridar, and Michela Verardo provided valuable feedback at various stages of the project. I also thank participants at the 2005 JAR conference for their comments.

ABSTRACT

Disclosures play an apparently critical role in the empirical regularity of the short-run momentum and long-run reversal in stock returns. Motivated by this evidence, this paper integrates an analysis of disclosures within an asset pricing model to arrive at a framework in which disclosures and asset returns are jointly determined. Disclosures resolve uncertainty, but the increased information flow also raises the risks during the disclosure period. When disclosures and asset returns are modeled jointly, apparently good news is associated with the upward revision of future disclosure risks. The model generates predictions that have the outward appearance of short-run momentum and long-run reversal.

Ancillary