Disclosure Quality and the Excess Value of Diversification

For a sample of US firm years from 1980 through 1996 the authors document a positive association between the excess value of diversification as defined by Berger and Ofek (1995) and security analyst ratings of voluntary disclosure as developed by the Association for Investment Management and Research. They also examine an alternative proxy for disclosure quality that captures the degree of segment disaggregation and document a positive association between this measure and excess value. Their results are robust to controls for firm performance and information environment. Taken together, these phenomena suggest that disclosure plays a monitoring role in disciplining management's investment decisions. However, tests of the association between disclosure and the value of firms' investment spending yield mixed results.