Do Firms Provide Informative Disclosures in An Environment of Extreme Uncertainty? Evidence from the COVID-19 Pandemic

We study the informativeness of corporate disclosures in an environment of extreme uncertainty by using the COVID-19 pandemic as the setting. During the initial stage of the pandemic, firms had to respond to an unprecedented crisis with little prior experience or guidance from regulators. We find that COVID-19 disclosures in annual reports appeared to have been informative to investors during this period of extreme uncertainty. Using two measures of disclosure quality derived from unsupervised machine learning, we find that the market reacts more strongly to COVID-19 disclosures that are more firm-specific. Understanding firms’ disclosure behavior in an environment of extreme uncertainty has important policy implications and may inform securities regulators on the role they should play in similar situations as the SEC transitions to a more principles-based approach towards disclosure regulation.