On financial disclosure and the behavior of security prices

The paper addresses the question: what impact does a change of a firm's information-disclosure environment have on its stock price behavior? Assuming that disclosure does not have any effects on production financing programs, that the CAPM obtains, and information can be characterized as 'linear', a number of results are provided. It is shown that disclosure leads to increased variability in stock price; the result is consistent with several empirical studies [Beaver (1968), May (1971), and Patell and Wolfson (1979)]. Further, the price that would be expected in a richer information environment is simply equal to the price that actually obtains in a less rich environment. Finally, risk and return parameters are essentially independent of changes in the disclosure environment.