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Disclosure of Accounting Information and Stock Return Volatility in Brazil

Otavio Ribeiro De Medeiros1

Luis Gustavo do Lago Quinteiro2


Recent studies have shown the existence of a relationship between the disclosure of
accounting information and economic effects. The disclosure of value-relevant accounting
information reduces the information asymmetry on the market and, consequently, the risk of
investors making mistakes in their decisions, which fosters the attraction of foreign capital.
This paper has the purpose of investigating if there is a cross-firm relationship between the
disclosure of accounting information and the volatility of stock returns of Brazilian firms. The
hypothesis tested is that firms with higher levels of disclosure present lower volatility of stock
returns. The research design involves a sample including 40 stocks belonging to 30 firms
listed on the Brazilian stock exchange (Bovespa) and an econometric model consisting of a
cross-firm linear regression, as well as robustness tests. The empirical tests performed are
robust and confirm the hypothesis raised a priori.

Key words: Brazilian stock market, stock returns, disclosure, accounting, volatility,
econometric model, linear regression.

1. Introduction

Recent research has demonstrated the existence of a relationship between the

disclosure of value-relevant accounting information and economic effects. These effects can
be perceived on various levels, such as the accuracy of earnings forecasts made by market
analysts (Hope, 2003), the increase of stock liquidity, the reduction of capital costs, and the
increase of firm monitoring by market analysts (Healy and Palepu, 2001; Botosan and
Plumlee, 2002), the impact on bid-ask spreads of traded securities (Greenstein and Sami,
1994), as well as the effect on the mobility of international capital (Young and Guenther,

As a developing country, Brazil needs investments to foster its economic growth. The
stock market is one of the sources of funds available to firms when they need long-term
financing. However, well defined regulations with respect to taxation, minority shareholder
protection as well as sound corporate governance mechanisms are necessary for stock market
development, providing higher transparency and permitting a better control of corporate
events. Besides the level of market development, a potential barrier to capital movements,
according to Young and Guenther (2003), is the cost for the investor to become well
informed. Lower disclosure levels imply higher information costs, which changes the risk-
return relationship of an investment option. The timely disclosure of high-quality accounting
information reduces the risk of investors incurring losses in their transactions, which increases
the international capital mobility (Bushman and Smith, 2001).

Presuming a stock market reaction to the disclosure of accounting information, this

paper has the purpose of analyzing the relationship between the level of disclosure and the
MSc (COPPEAD), MSc (London), PhD (Southampton); Full Professor, Department of Accounting and
Graduate Program in Administration, UnB - Universidade de Brasilia, Brazil.
Master in Accounting, UnB-Universidade de Brasilia; Banco do Brasil.

risk (volatility) associated to stock returns of 40 stocks belonging to 30 Brazilian firms listed
at Bovespa3, which had their disclosure ratings reported by Standard & Poor’s in 2001. The
paper covers the period from January 2002 to June 2004. The hypothesis being tested is that
firms with higher levels of disclosure of accounting information present lower volatility of
stock returns. Based on significant statistical results, we find out that this hypothesis cannot
be rejected. We estimated a significant β regression coefficient for the proxy of disclosure of
minus 0.025, indicating a negative relationship between disclosure and risk. This means that
the higher the disclosure level, the lower is the risk associated to the stock.

The paper’s contents are as follows. Section 2 deals with the definition and several
aspects of disclosure within the accounting environment, including its target audience, its
characteristics, the problem of resistance to disclosing, the relationship between compulsory
disclosure and voluntary disclosure, as well as the microeconomic and financial effects of
disclosure, based on recent studies. In Section 3, we present an empirical study with a sample
involving 30 Brazilian firms and 40 stocks ranked by Standard & Poor’s, and Section 4
finalizes the paper with the conclusions.

2. Disclosure

Disclosure is one of the amplest areas in accounting, as it involves the whole

accounting information system. The first question usually raised is: which information must
be disclosed? To answer reasonably well to this question, it is necessary to know the users and
their needs. Generally speaking, accounting has different groups of users, which makes the
task of identifying their needs and to define the scope and profundity of the information to be
disclosed a complex task.

This Section has the purpose of discussing fundamental questions involving

disclosure, such as its targeted public, which information must be disclosed, in which level of
detail, what the timing of disclosure is, and how the accounting and financial information
should be disclosed. Additionally we discuss the resistance to disclosing, the relationship
between compulsory and voluntary disclosure, the role of regulators of the disclosure process,
and finally the economic effects generated.

According to the WordNet – A Lexical Database for the English Language

(, disclosure is the speech or act of making something evident,
whereas to Wikipedia (, disclosure means the giving out of
information which might commonly be kept secret, usually voluntarily or to be in compliance
with legal regulations or workplace rules. The simple word definition, however clear it seems,
is not capable of given the exact meaning of its amplitude in accounting. After all, in the
context of accounting is this thing called disclosure?

Within the accounting context we can see that disclosure is connected to the
qualitative goals of accounting information, such as comprehensibility, relevance and
materiality, trustworthiness, and comparability, permeating all the accounting system and
entangling itself with the objectives of accounting themselves. As a matter of fact, there exists
a controversy around the nature of disclosure, being in dispute if it is an objective, a principle,

Bovespa – Bolsa de Valores de São Paulo (São Paulo Stock Exchange) is by far the most important stock
exchange in Brazil.

a postulate or a convention. Actually, disclosure is more than a principle: is a kind of linking
between postulates, principles, and accounting objectives. It is a means of achieving the
objectives of accounting.
3.1 Who is interested on disclosure?

Those interested on the disclosure of accounting information are the users of

information. By users we understand all of those who are interested in monitoring the
performance of a certain organization, either internal or external to it. In order to define the
communication standard of the accounting information it is necessary to draw a profile of its
users. It is presumed that this user, usually called standard user, is a well informed reader,
capable of selecting the information, making choices, taking decisions, and having a rational
behavior and knowledge on the principles and procedures adopted by accounting.

Accounting has various groups of users, such as stockholders and investors,

employees, creditors, government, clients, managers, and the general public. For each group
of users a specific approach becomes necessary. The set of basic information made available
strives to emphasize the interests of its most representative group, even because of practical

The American school of accounting demonstrates within its predominant stream that
the most important users of accounting information are the stockholders and investors, which
means the capital owners. On the other hand, in Europe the idea is to emphasize to what
would be the more representative group of users, rather than focusing on stockholders and
investors. In France, for example, firms must compulsory present each year a social balance
sheet to the firm’s council of employees, which is composed by employees and executives,
stressing the social character of the firms (Hendriksen and Van Breda, 1992).

Several aspects might influence the emphasis on the user such as legislation, the
country’s cultural aspects, profile, level of sophistication, and even lack of knowledge about
his decision model. Given all these points, especially the difficulties of knowing the decision
model of each type of user, Hendriksen and Van Breda (1992) have sustained that it is
virtually impossible to have a model that suits all users. To attend all is one of the great
challenges of accounting.
3.2 What should be disclosed?

In an attempt to define the limits of accounting disclosure, i.e. how much to disclose,
the Accounting Institute of Certified Public Accountants (AICPA), recommended by means
of the Accounting Research Study - ARS n° 1 (1961), that accounting reports must disclose
what is necessary not to be deceitful. Although not clarifying the limits of disclosure, which
were more objectively focused by the abovementioned authors, the AICPA has demonstrated
the preoccupation that the financial statements must properly reflect the organization’s
financial and economic reality, so that the users are not induced to take decisions on
misleading information.

Attempting to summarize what was established by ARS no. 1, Hendriksen and Van
Breda (1992) have listed some situations that, if not disclosed, might produce misleading
financial statements:
 Use of procedures that affect materially the presentation of earnings or balance
sheets, which compared with alternative methods might be assumed by the
reader, in the absence of disclosure;
 Important changes in procedures from one period to another;
 Significant events or relationships not deriving from normal activities;
 Special contracts or arrangements that affect the relationships between
involved contractors;
 Material changes or events that would normally affect expectations;
 Material changes of activities or operations that would affect the firm’s
One can see that materiality permeates this set of situations, appearing as an important
factor in the quest for the quality of accounting information.
3.3 When to disclose?

The disclosure timing is directly related to the concept of opportunity. Information

cannot be relevant if it is not opportune. This means being available to the individual for
decision making before he loses the capacity to influence it. The opportunity does not
guarantee relevance, but certainly there is no relevance without opportunity.
3.4 Disclosure forms and methods

The disclosure of information involves all the financial accounting process. However,
there are several disclosing methods available. The choice of the most adequate method
depends on the nature and relative importance of the information to be disclosed. The most
common methods are the following:
 Formal financial statements: the most relevant and significant information
must always appear on the body of one or more financial statements, wherever
it is possible to include it (balance sheet, income statement, cash-flow
statement, statement of changes in net worth);
 Information between parentheses: utilized for short information or to highlight
certain statement items;
 Explanatory notes: aims at supplying information that cannot be described on a
statement’s body without reducing its clearness;
 Supplementary statements and exhibits: the statements are used for detailing
information included on the financial statements, whereas the exhibits are
suitable to present a certain aspect that one wishes to put forward, such as the
presentation of statements in foreign currency;
 Audit report: the auditor’s statement has the purpose of testifying the
truthfulness of the information and the validity of the method and accounting
procedures utilized or to show eventual divergences between the methods and
procedures used by the firm and the generally accepted accounting principles;
 Annual administration report: it is the means by which the firm discloses its
opinions on the market where it operates, its future expectations, its growth
plans, etc. it must be regarded with caution, since it might show an excessive
optimism from the firm’s point of view; and
 Management discussion and analysis reports, in which the firm present detailed
analyses concerning its financial performance.

3.5 How much to disclose?

The disclosure level partially depends on the sophistication level of the reader that
uses it, as well as on the disclosure standard considered more desirable. The disclosure
standard can be divided into three levels:

 Adequate disclosure – assumes a minimum information volume of disclosure
compatible with the purpose of avoiding misleading financial statements. The
information must be adequate to the user understanding, and to the actual
situation of the firm at the time they refer to.

 Fair disclosure – considers an ethical purpose of equity treatment of all

potential readers. Financial statements must report the firms’ situation in a fair

 Full disclosure – considers the presentation of all relevant information. The

financial statements must contain all the information which if omitted or ill
disclosed might lead to serious errors concerning the firm’s assessment and its

Actually, the difference between the three levels of disclosure above is very subtle.
Some argue that all disclosed information must be adequate, fair and full, at least with respect
to the detail that is being evidenced. The meaning of disclosure is that the information that is
not relevant should be omitted, so as to make the accounting statements significant and liable
to full understanding. Nevertheless, the resistance to disclose remains as an issue that has
been object of many studies.
3.6 Resistance to disclosing

Hendriksen and Van Breda (1992) have pointed out that, in general, firms resist in
increasing the degree of disclosure of their information when there is no pressure from the
accounting community or the authorities. The tendency would be that firms would disclose
only the minimum necessary, i.e. what is established by the norms (compulsory disclosure).

According to these authors, there are several reasons that take firms to resist to
disclosing relevant information. Among these, they stress the following:
 To avoid providing advantage to competitors;
 To avoid providing advantage to trade unions;
 Difficulty of understanding by investors;
 Cost x benefit tradeoff;
 Ignorance about the users’ needs.
There is controversy concerning the fundaments of these issues, since for example
competitors utilize other means to collect the desired information, besides the formal
documents of the firm. The issue on trade unions is also questionable for according to
Hendriksen and Van Breda (1992) there is evidence that wage negotiations occur much more
harmoniously when the information is openly discussed, instead of reserved. The difficulty of
understanding by investors might not be a reasonable justification for not disclosing since
there are professional analysts and portfolio managers specialized in assessing firms and
subsidize investors.

The informational cost x benefit tradeoff can be considered partly relevant, since
there are really less costly forms of disclosing. The cost of publishing information, generally
on newspapers with large circulation, tends to be high. On the other hand, this should not
prevent that the user has access to information that is relevant to the decision making process.
A more convincing point is the lack of knowledge about the users’ needs. This is really a
challenge to accounting in its mission to well inform.

Another important matter, which also relates to the competitor issue, is the limit
between the protection of strategic information and the denial of relevant information. There
are cases, such as those foreseen on the International Accounting Norms, in which the
disclosure of information can be restrained in case it might harm the firm’s interests, such as
the disclosure of the situation or details concerning contingent liabilities. In some countries it
is permitted not to disclose certain information that, at the managers evaluation, might bring
significant damage to the firm such as for example the reports by segment or their parts in
countries as France, Ireland, Netherlands, Poland, and the UK (GAAP 2001).
3.7 Compulsory versus spontaneous disclosure

Considering the tendency towards the protection of information, the regulatory

agencies and the professional organizations arise as important characters in the information
disclosure process, establishing minimal standards that guarantee an adequate level of
information to users.

Bushman, Piotroski and Smith (2004) have concluded, based on empirical studies
performed with a group of countries, that the transparency of corporate governance practices
is primarily related to the country’s legal system. Higher transparency is perceived in
countries were there are an adequate set of laws and legal norms concerning the corporate
governance, as well as the efficiency of the legal system. According to these authors, financial
transparency is more linked to the political regime. The countries that present the best levels
of financial transparency are those where there is low participation of the state in firms and
banks, besides lower possibilities of the government to expropriate the firms’ finances.

Eng and Mak (2003) have shown, based on a study performed with 158 listed firms in
Singapore, that the power structure, the characteristics of controllers, as well as the
composition of the board affect the levels of voluntary disclosure. They have concluded that a
lower participation of external (professional) directors and higher government participation in
the capital composition are related to higher levels of disclosure; a higher number of
professional directors reduce the levels of corporate disclosure; and large firms and those with
low debt have higher levels of disclosure.

Professor Fred Choi, from New York University have demonstrated there is a direct
relation between better levels of disclosure and the need of raising resources, which shows
that firms tend to raise their disclosure levels when they need to access certain capital markets
(Hendriksen and Van Breda, 1992). This statement has been confirmed by an empirical study
performed by Khanna, Palepu and Srinivasan (2004), with 794 firms from 24 countries in the
Asian-Pacific area and Europe, which shows that firms adopting disclosure rules similar to the
American standard are those that effectively present stronger relationship with the US. They
have prepared a score of firms’ disclosure using as benchmark the United States Generally
Accepted Accounting Principles - USGAAP), and they verified the firms with larger scores
have higher levels of relationship with the American market, with respect to listing on
American stock markets, to the flow of exports to the US, to the flow of investments from the
US, as well as to the operations of these firms in that market.

The diversity of interests, the importance of the set of legal norms and the efficacy of
the legal system in establishing and supporting the application of accounting norms, besides
the differences that might exist on the levels of voluntary disclosure among firms, suggest that
regulation (compulsory disclosure) is essential for the establishment of minimum disclosure

standards, since the limits of voluntary disclosure are fundamentally associated to the firms’
3.8 The economic and financial effects of disclosure

Bauman and Nier (2004) have presented evidence suggesting that transparency and
disclosure may be useful to both investors and banks. In particular, they investigated the
cross-sectional association between banks’ long-run average stock price volatility and the
long-run average level of disclosure that banks provide in their annual accounts. Controlling
for a number of other factors, such as the size and risk of the bank, they find that banks that
disclose more information on key items of disclosure show lower measures of stock volatility
than do banks that disclose less information. This finding suggests that disclosure may be
useful for investors. But it also suggests that there may be benefits for banks. In particular,
lower stock volatility may result in a lower cost of capital and increase the effectiveness of
stock-based compensation. Besides, their evidence suggests benefits of disclosure for
supervisors that use market indicators of bank performance alongside supervisory
information. In particular, a lower volatility of equity returns may reduce the likelihood that
the stock price gives the wrong signal on the relative performance and risk of the bank.

Several studies have demonstrated the relationship between disclosure and economic
effects, as for instance the relationship between specific differences of information disclosure
standards between countries and the mobility of international capital (Young and Guenther,
2003). Bushman and Smith (2001) have sustained that the previous commitment of firms with
the timely disclosure of high quality accounting information reduces the risk of investors
suffering losses in their transactions, which attracts more resources to the capital market.

Free international capital mobility is defined as follows: “Capital is freely mobile

within a multi-country region when its residents face no official obstacles to the negotiation
and execution of financial trades anywhere and with anyone within the region, and face
transaction costs that are not greater for parties residing in different countries than for parties
residing in the same country” (Obstfeld, 1993, p. 2)

The financial literature (Cooper and Kaplanis, 1994; Tesar and Werner, 1995) have
documented that individual portfolios are strongly concentrated in domestic securities in
detriment of higher gains coming from international diversification. The reason for this is the
existence of barriers to capital mobility.

One barrier to capital mobility is the cost difference between domestic and foreign
investors to be well informed. This means that if foreign investors incur in higher costs to
obtain information, they will be less informed and will incur higher risks of taking mistaken
decisions or will pay higher prices to keep as well informed as domestic investors. In any
case, the risk-return tradeoff of foreign investors will be less favorable than that of the
domestic investor. This means that if he takes his decisions based on that relation, this would
probably be one reason to discourage him to negotiate in that market, which will reduce the
capital mobility in that country (Bushman and Smith, 2001).

Diamond (1985), Verrecchia (1982) and Lundholm (1991) have corroborated with
the idea that the firms’ previous commitment in producing timely relevant high quality
accounting information reduces additional costs of foreign investors, minimizing eventual
disadvantages. This implies in reducing information asymmetry, risk and, consequently, in
increasing capital mobility.

Young and Guenther (2003) have demonstrated empirically the existence of a
statistically significant relationship between the disclosure of accounting information and
international capital mobility, based on a study with a group of 23 countries. They collected
the levels of compulsory disclosure of countries based on 15 items considered important for
foreign investment decisions and confronted with a international capital mobility factor based
on three indexes: country consumption, International CAPM (Capital Asset Pricing Model)
and Gross Formation of Fixed Capital. They verified that countries with a high degree of
disclosure and low submission of financial accounting to fiscal accounting fiscal, present high
levels of international capital mobility.

Healy and Palepu (2001) have shown the importance of disclosure and accounting
information for the communication of performance and corporate governance of firms by the
management and provide a structure for analyzing the influence of disclosure on the
adjustment of the stock market. Among the points raised by them, three disclosure effects
considered beneficial of disclosure to firms: improvement of stock liquidity on the market,
reduction of capital cost and increasing of the monitoring of the firm by financial analysts.

Utilizing a sample of 22 countries, Hope (2003) has shown that a direct and positive
relationship between the level of disclosure, the enforcement accounting standards and the
precision of firms earnings forecasts prepared by financial analysts. The author concludes that
enforcement stimulates managers to abide to the accounting norms and that this, by its turn,
diminish analysts uncertainties. Besides, enforcement would be more important in markets
where there are several alternatives concerning the application of accounting rules, whereas
disclosure shows itself essential when there is a low degree of monitoring of firms by market

Greenstein and Sami (1994) have reported an empirical study revealing that
information disclosure by segment required by the SEC – Securities and Exchange
Commission in the US in the 70’s, produced a reduction of the spread required by the market
and increased the liquidity of securities traded. According to the study, the higher the number
of segments disclosed, the lower the spread required by the market, showing that the increase
of disclosure produced a reduction of uncertainties and of information asymmetry among
investors, lowering the transaction costs and consequently the spreads required.

One of the conclusions put forward by Botosan and Plumlee (2002) is that firms
presenting higher levels of disclosure of annual reports present a cost of capital 0.7 base
points lower than those that disclosed the minimum required.

3. Research design
3.1 Scope and research hypothesis

The paper’s purpose is to test empirically the cross-firm impact of varying levels of
accounting disclosure on the volatility of stock returns of Brazilian firms listed at Bovespa.
Considering the theoretical and bibliographical review presented on the previous sections, we
formulate the following research hypothesis: listed firms with higher levels of accounting
information disclosure possess shares with lower stock return volatility. This means that
disclosure reduces the risk for investors. Such hypothesis is tested by means of the methods
described below.

3.2 Sample and data

Our sample involved Brazilian firms, issuers of stocks included on the disclosure
ranking prepared and published by the rating agency Standard & Poor’s (S&P) in 2001,
denominated Standard & Poor’s Company Transparency & Disclosure Survey. The stock
prices from which returns were calculated were taken from Economatica®. There are currently
30 Brazilian firms evaluated by S&P, totaling 40 market traded stocks, since some of them
have more than one type of stock traded at Bovespa, all of which were included in our sample.
The 30 firms included in the sample accounted together for around 85% of participation in the
Bovespa stock index in May 2004, as shown on Appendix B.
3.3 Methods

The analysis of the effect of disclosure on stock return volatility was based on a cross-
firm linear regression, which was specified by equation (1):

σ i ,t = α + β ⋅ SPFTi ,t + ε i ,t (1)

where σi,t is the volatility (standard deviation) of stock returns, α and β are the regression
parameters, SPFTi,t is the S&PFT index, εi,t is a stochastic error term assumed to be i.i.d.
gaussian (normal), and subscripts i and t refer to the i-th firm and period t.

The effect of accounting disclosure upon stock return volatility is captured by the β
coefficient in equation (3), whereas the intercept α represents stock-return volatility
unexplained by (invariant with) disclosure. We expect β to be negative, since a higher level of
disclosure should correspond to a lower volatility of stock returns. We strongly expect α to be
positive, because if SPFT = 0, a negative α could generate a negative σi,t, which would violate
a non-negativity mathematical condition (standard deviations cannot be negative).

The transparency and disclosure index developed by S&P can be decomposed into
three levels: ownership structure and investor relations; financial transparency and
information disclosure; and board and management structure and processes. Since our study
focus the effect of accounting disclosure, we only used the sublevel Financial Transparency
and Information Disclosure (S&PFT) as a measure of disclosure in the empirical tests.

The S&PFT index is computed based on a questionnaire composed by 35 items

(Appendix A) with equal weights referring to policies and accounting standards adopted by
each firm and having as reference the IAS – International Accounting Standards and the
USGAAP. The questions admit a binary answer: 1, when the item is attended and 0,
otherwise. The overall score attributed to firms varies from 0 to 10, and it is computed as

N o of items attended
Score = ×10 (2)
Total N o of items

Considering that the S&PFT index is presented as integer numbers, there is a rounding
criterion that was not disclosed by S&P on the aforementioned document.

The stocks’ risk level is measured by the volatility of their returns, including dividend
payments. Stock return volatility is measured by its standard deviation for a 29-month period

from January 01, 2002 to June 09, 2004. Stock returns are calculated upon daily stock closing
quotes. Hence, stock return volatility is given by equation (3):

∑ (R
i =1
i ,t − Rt ) 2
σ i ,t = (3)
n −1

where σi,t is the standard deviation (volatility) of the i-th stock return on date t, Ri,t is the i-th
stock return on date t, Rt is the cross-firm average of all stock returns included in the sample
on date t, and n is the number of stocks included in the sample (n = 40).

Stock returns (Ri,t) are calculated according to the continuous capitalization process
given by equation (4):

Pi ,t
Ri ,t = log (4)
Pi ,t −1

where log is the natural logarithm operator and Pi,t is the closing price of the i-th stock on date

The analysis of the influence of disclosure upon stock volatility was performed for the
period from January 2002 to June 2004. We have chosen this period because the S&PFT
index was disclosed in August 2001. Considering the hypothesis of market efficiency, we
assumed that the level of firms’ disclosure is continuously perceived by the market. However,
we expect that the disclosure of rankings by top rating agencies such as S&P should provoke
price adjustments on stock market prices and consequently on stock returns. For this reason,
we opted to check the effect of the ranking on stock return volatility after the S&PFT index
was disclosed.
3.4 Analysis of results

Equation (1) was submitted to a cross-section linear regression by ordinary least

squares, with the elimination of 3 outliers. Exhibit 1 presents a statistical summary referring
to the regression with the estimated coefficients and the robustness test statistics. These are
the t, F, R2, Durbin-Watson, Bera-Jarque and White statistics and their corresponding p-
values, when applicable.

Estimated coefficients t statistics p-value

α 0.5876 8.7830 0.0000
β -0.0256 -2.3390 0.0255
F 19.3399 - 0.0000
R2 0.7785 - -
DW 1.6183 - -
BJ 1.9958 - 0.3686
W 3.9501 - 0.7855
Exhibit 1: Cross-firm regression results

The empirical results are statistically robust and consistent with the hypothesis
formulated previously. The estimate of coefficient β is significant and negative (β = –0.0256;
p-value = 0.0255), which matches the expectations, since the higher the disclosure indicator
associated to a specific stock (S&PFT index) the lower the stock return volatility of this stock.
The estimate for the intercept is significant and positive (α = 0.5876; p-value = 0.0000)
represents the estimate of a residual volatility that cannot be explained by disclosure and it is
mathematically consistent. The regression explains 77.85% of the variations of stock return
volatility (R2 = 0.7785).

The other tests performed – Durbin-Watson (DW), Bera-Jarque (BJ), and White (W) –
ensure the robustness of the results. In the DW test, the null hypothesis of cross-firm
autocorrelation is rejected at the 5% level. The BJ tests indicates that the null that the
regression residuals are gaussian cannot be rejected at 5%, whereas the White test points
toward the rejection of the null of heteroscedasticity of the regression residuals, also at a 5%
significance level. All of these results confirm the robustness of the regression.

4. Conclusion

We believe that the paper’s purpose was successfully accomplished. The empirical
results obtained demonstrate that that the level of disclosure of accounting information,
proxied by the Standard & Poor’s Financial Transparency and Information Disclosure
(S&PFT) has a significant and negative effect upon stock’s market risk, measured by stock
return volatility (standard deviation) of Brazilian listed firms, which confirms the
predetermined hypothesis.

The upshot strongly suggest that higher levels of disclosure of accounting information
produce a reduction of the market’s perception of the risk associated to stocks, which lowers
the risk versus return relationship of marketed securities. The results confirm for the Brazilian
accounting and stock market environments the beneficial effects of accounting disclosure
documented in previous empirical studies (Young and Guenther, 2002; Bushman and Smith,
2001; Diamond, 1985; Verrecchia, 1982; Lundholm, 1991).

Given the firms’ resistance to disclose pointed out in the beginning of this paper, our
results might contribute to the clarification of the advantages of disclosing accounting
information by firms and to decrease the resistance to disclose. The evidence presented in this
paper suggests that accounting information disclosure may be useful to both investors and

5. References

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Bushman, R., Piotroski, J. and Smith, A. What Determines Corporate Transparency? Journal
of Accounting Research, 42, 207-252, 2004.

Cooper, I.A. and Kaplanis, E. Home Biases in Equity Portfolios, Inflation Hedging and
International Capital Market Equilibrium, Review of Financial Studies, 1994.
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Interacting with U.S. Markets, Journal of Accounting Research Vol.42, 2004.
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Appendix A –Disclosure Survey

Standard & Poor's Transparency & Disclosure Survey 2001

Financial Transparency & Information Disclosure
Does the company in its annual accounts disclose….
1 its accounting policy?
2 the accounting standards it uses for its accounts?
3 accounts according to the local accounting standards?
4 accounts according to an internationally recognized accounting standard (IAS/US GAAP)?
5 its balance sheet according to international accounting standard (IAS/US GAAP)?
6 its income statement according to international accounting standard (IAS/US GAAP)?
7 its cash flow statement according to international accounting standard (IAS/US GAAP)?
8 a basic earnings forecast of any kind?
9 a detailed earnings forecast?
10 financial information on a quarterly basis?
11 a segment analysis (broken down by business line)?
12 the name of its auditing firm?
13 a reproduction of the auditors' report?
14 how much it pays in audit fees to the auditor?
15 any non-audit fees paid to auditor?
16 consolidated financial statements (or only the parent/holding co)?
17 methods of asset valuation?
18 information on method of fixed assets depreciation?
19 a list of affiliates in which it holds a minority stake?
20 a reconciliation of its domestic accounting standards to IAS/US GAAP?
21 the ownership structure of affiliates?
22 details of the kind of business it is in?
23 details of the products or services produced/provided?
24 output in physical terms? (number of users etc.)
25 characteristics of assets employed?
26 efficiency indicators (ROA ROE etc.)
27 any industry-specific ratios?
28 a discussion of corporate strategy?
29 any plans for investment in the coming year(s)?
30 detailed information about investment plans in the coming year(s)?
31 an output forecast of any kind?
32 an overview of trends in its industry?
33 its market share for any or all of its businesses?
34 a list/register of related party transactions?
35 a list/register of group transactions?

Appendix B – Volatility and Disclosure

Code Firm Particip. Volatility S&PFT

Telemar-Tele NL Par 12.9 0.39 6
PETR Petrobras 8.2 0.34 6
BBDC Bradesco 4.5 0.36 5
VALE Vale Rio Doce 4.1 0.31 8
EBTP Embratel Part 3.9 0.76 8
USIM Usiminas 3.2 0.51 5
ELET Eletrobras 3.1 0.51 5
ITAU Bco Itau Hold Finan 3.1 0.36 7
CMIG Cemig 3.0 0.46 5
AMBV Ambev 2.8 0.33 7
CSNA Sid Nacional 2.7 0.47 7
PETR Petrobras 2.3 0.37 6
GGBR Gerdau 2.2 0.39 6
BRTO Brasil Telecom 2.2 0.40 6
EMBR Embraer 2.2 0.42 6
PLIM Net 2.1 0.92 4
CPLE Copel 1.9 0.49 4
TCOC Tele Centroeste Cel 1.8 0.54 5
BRTP Brasil T Par 1.7 0.40 7
VALE Vale Rio Doce 1.4 0.32 8
EBTP Embratel Part 1.3 0.78 8
ITSA Itausa 1.3 0.34 6
ACES Acesita 1.3 0.44 6
ELET Eletrobras 1.1 0.56 5
TNLP Telemar-Tele NL Par 1.1 0.44 6
TMCP Telemig Celul Part 1.1 0.49 6
SBSP Sabesp 1.1 0.41 5
TNEP Tele Nordeste Celul 1.0 0.48 8
TCSL Tele Celular Sul 1.0 0.48 7
ARCZ Aracruz 1.0 0.36 8
ELPL Eletropaulo Metropo 0.7 0.70 4
EMBR Embraer 0.7 0.42 6
CRTP CRT Celular 0.7 0.38 5
BRAP Bradespar 0.5 0.43 5
CESP Cesp 0.5 0.58 5
BRTP Brasil T Par 0.4 0.44 7
TCSL Tele Celular Sul 0.3 0.56 7
LIGH Light 0.3 0.61 5
CMIG Cemig 0.1 0.47 5
PCAR Pao de Acucar - 0.37 5
Participation 85.2
Participation in the Bovespa index on 05/31/2004.

Volatility (29 months) from 01/01/2002 to 06/09/2004.

S&PFT = Financial Transparency & Information Disclosure Survey - Standards & Poor’s (08/17/2001).