Disaggregation Quality, Stock Returns, and Institutional Demand

We find that financial statement disaggregation quality (DQ), a measure of the fineness of financial statements, is a strong predictor of future stock returns. Institutional investors prefer high-DQ stocks, and their trade gradually incorporates reporting quality into stock prices over a year following disclosures. The relationship between DQ and future stock returns and institutional investors' preference are stronger for small firms, during higher market-wide uncertainty periods, and robust to replacing DQ with change in DQ. Our findings provide evidence that capital markets are not perfectly efficient, and the discovery of stock prices is a gradual process facilitated by institutional demand.