Disclosure and volatility: Tests with structural equations

Abstract

The aim of this paper was to analyze the relationship between the disclosure level of accounting reports of the Brazilian non-financial companies listed on the NYSE (New York Stock Exchange) and the volatility in the return of their assets. The proposed analysis was performed through the use of Structural Equation Modeling; in the development of the tests, we considered the potential differences in informational efficiency of capital markets in Brazil and in the U.S. (Fama, 1970, 1991). We observed that the size of the companies showed a positive and significant relationship with the disclosure level, indicating that even if the companies of the sample have the best levels of disclosure, because they emit ADRs levels II or III at NYSE, and thus tend to be in a group of large companies, size was positively and significantly related to disclosure. For a 5% level of significance, we also confirmed the hypothesis that firms with higher levels of disclosure had lower volatility in returns on their securities. Thus, companies with more detailed information about financial instruments in their financial reports showed less volatility in the returns of their shares.

Keywords: disclosure, volatility, financial instruments.