The Impact of Corporate Financial Disclosure on Investor Confidence and Market Efficiency Indicators

Posted: May 14, 2021

• Emily Hill
• Emily Wilson
• Emma Smith

Abstract

This research investigates the complex relationship between corporate financial disclosure practices, investor confidence, and market efficiency through a novel methodological framework that integrates natural language processing, behavioral finance principles, and network analysis. Unlike traditional studies that focus primarily on disclosure quantity, our approach examines the multidimensional quality of financial disclosures across three critical dimensions: linguistic transparency, contextual relevance, and temporal consistency. We develop a proprietary Financial Disclosure Quality Index (FDQI) that captures these nuanced aspects using advanced text analytics applied to 5,000 corporate earnings releases and annual reports from SP 500 companies over a five-year period. Our methodology represents a significant departure from conventional approaches by incorporating investor sentiment analysis derived from social media platforms and financial forums, creating a comprehensive measure of investor confidence that extends beyond traditional market-based indicators. The findings reveal several counterintuitive relationships: while increased disclosure frequency generally correlates with improved market efficiency, excessive disclosure complexity can paradoxically undermine investor confidence, particularly among retail investors. Furthermore, we identify a disclosure threshold effect where beyond optimal levels, additional information provision yields diminishing returns for market efficiency. The study also uncovers sector-specific variations in disclosure effectiveness, with technology and healthcare sectors demonstrating different optimal disclosure patterns compared to traditional manufacturing and financial services. These insights challenge prevailing regulatory assumptions about disclosure standardization and provide empirical evidence for more nuanced, sector-specific disclosure frameworks. Our research contributes to both academic literature and practical regulatory policy by offering a more sophisticated understanding of how disclosure characteristics interact with investor psychology to influence market outcomes.