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Differential Prior Voluntary Disclosure Levels and Market Reaction to Interim Earnings Announcements *

This study examines the relationship between cross-sectional differences in prior voluntary disclosure levels and the market reaction to a forthcoming earnings announcement. Based on the Kim and Verrecchia (1991) framework, firms with higher levels of preannouncement voluntary disclosure are found to have less price and volume reaction about a forthcoming earnings announcement after controlling for other determinants such as firm size, level of unexpected earnings and the precision of the announced information. This suggests that increased voluntary disclosure by firms improves the market’s preannouncement information relative to a forthcoming announcement, resulting in less revision of expectations around the earnings announcement. However, the strength of the negative relationship between prior levels of voluntary disclosure and the market reaction appears to be decreasing as the amount of analyst following increases, suggesting that financial analysts’ information output and management’s voluntary disclosures are competing information sources for investors. Further analysis suggests that forward-looking disclosure appears more relevant to investors as compared to general business data disclosure and the management’s discussion and analysis of past operations.