A Back-of-the-Envelope Structural Estimator of Disclosure Costs

This study develops a simple non-parametric structural estimator for the implied disclosure cost in the model of Verrecchia (1983). The estimator is a function of three characteristics of observed disclosures: (i) the minimum disclosure, (ii) the average disclosure surprise, and (iii) the frequency of disclosure. We also show that the estimator will correctly identify zero cost if withholding is driven by uncertainty about information endowment or if disclosures are not strategic. Applying the model to one-year ahead management earnings forecasts, we find positive costs for about two out of ten firms making at least one forecast and estimate, for the median firm in this group, the cost to be about two percent of lagged assets. A decomposition of the cost in terms of economic determinants offers some evidence that the cost captures proprietary competitive information. Litigation risk seems to provide some explanation why some firms exhibit zero costs.