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Discretionary Disclosure of Customer Information and Average Stock Returns

Firms with lower levels of disclosure hold more private information and thereby generate undiversified risk. This paper investigates the effect of discretionary disclosure of customer identities on average stock returns. Using a data set of firms’ principal customers, we find a negative relationship between the disclosure level of customer information and the cross-section of returns, after controlling for size, book-to-market ratio, momentum, and other return determinants. We also observe that individual investors are inclined to buy stocks that report more customer information. Overall, poor information on customer identity has higher costs of capital than do firms with good information quality.