By James Hamilton, J.D., LL.M.
There is a direct link between good disclosure practices and sound corporate governance, noted New Zealand Securities Commissioner David Jackson, and what academics call the ``informativeness of disclosure’’ can attract attention from analysts and ultimately drive market integrity. In remarks at the recent AIG Corporate Governance seminar, the commissioner observed that academic research has found that disclosure practices are an important link between corporate governance and market integrity and efficiency.
In what may be a case of first impression, the research found a strong correlation between the quality of governance in listed companies and how well informed the market is about those companies. The academics coined the term ``informativeness of disclosure’’ in an effort to quanity this link. Informativeness of disclosures is a variable that combines the frequency of disclosure with the actual utility of the disclosed information to market analysts, and the speed at which the information is reflected in stock prices.
By comparing the quality of corporate governance with the informativeness of disclosures, researchers concluded that better-governed firms are better at disclosure. More specifically, these companies made better disclosure of price-sensitive information and attracted more attention from market analysts. Moreover, the profit forecasts of those analysts tended to be more accurate than their forecasts for firms which had a lower corporate governance rating.