Financial Disclosure Quality and Capital Market Information Asymmetry Reduction

Abstract

This research investigates the nuanced relationship between the quality of corporate financial disclosures and the reduction of information asymmetry in capital markets, proposing a novel methodological framework that diverges from conventional event-study and regression-based approaches. We introduce a multidimensional, network-based contagion model that conceptualizes information asymmetry not as a static, firm-specific variable, but as a dynamic, systemic property
that propagates through inter-firm informational linkages and investor sentiment
networks. Our methodology synthesizes principles from complex systems theory,
behavioral finance, and textual analysis of unstructured disclosure data, moving
beyond traditional quantitative metrics of disclosure volume or frequency. We formulate and test three primary research questions: First, how do qualitative attributes of narrative disclosures—specifically semantic coherence, forward-looking
statement density, and risk discussion granularity—influence the rate of asymmetry
decay in a market network? Second, what is the role of disclosure timing heterogeneity across a sector in either amplifying or dampening systemic information
asymmetry? Third, can a firm’s high-quality disclosure generate positive externalities by reducing asymmetry for peer firms with lower disclosure quality? Our
analysis utilizes a unique, hand-collected dataset of annual report narratives from
the industrial sector over a fifteen-year period, processed through a bespoke natural
language processing pipeline to extract the proposed qualitative dimensions. Results from our network contagion simulations reveal several non-intuitive findings.
We demonstrate that the marginal impact of disclosure quality on asymmetry reduction is highly non-linear and contingent on a firm’s position within the sectoral
information network. Firms acting as ’informational hubs’ exert a disproportionately large influence on systemic asymmetry. Furthermore, we identify a critical
threshold of semantic coherence in narrative disclosures; beyond this threshold, the
contagion of reduced asymmetry accelerates significantly. We also find evidence
of strong positive externalities, where high-quality disclosures from market leaders
measurably improve the informational environment for laggards, challenging the
purely competitive view of disclosure. The paper concludes by outlining the im
plications of this systemic, network-oriented perspective for regulators aiming to
enhance market efficiency and for corporate managers strategizing their communication policies in an interconnected market ecology