The Impact of Different Information Environments on the Relationship between Disclosure Quality and Idiosyncratic Stock Risk: A Principal Component Analysis Approach

Abstract

The main purpose of this study was to investigate the impact of different information environments on the relationship between disclosure quality and idiosyncratic stock risk in listed companies in Tehran Stock Exchange. To investigate this issue, the research hypotheses were tested on the basis of a statistical sample of 86 companies over a 11 year period from 2009 to 2019 using multivariate regression models. For this purpose, management forecast error as a proxy for disclosure quality, capital asset pricing model for idiosyncratic risk measurement and company size criterion as representative of information environment are used. In order to calculate the management forecast errors, the absolute value of the composite measure of management forecast errors using the principal component analysis method was used. The results show that there is a negative and significant relationship between disclosure quality and idiosyncratic risk. Also, having a favorable (weak) information environment increases (decreases) the quality of disclosure and reduces (increases) idiosyncratic risk.

Keywords

• disclosure quality
• management forecast error
• idiosyncratic risk
• information environment
• principal component analysis