Frequent and inconsequential disclosure changes are made by managers in response to fleeting attention from institutional ownership (IO), according to the latest insights from Inna Abramova, John E. Core, and Andrew Sutherland (Massachusetts Institute of Technology, Sloan School of Management). The authors assessed how changes in IO attention affect disclosure decisions made by managers by documenting short-term disclosure changes taking place between 2001 and 2016, and also by using the proxy for distraction developed and validated by Kempf et al. (2017). The authors also examine how this attention impacts the resulting information quality and liquidity produced in these disclosures.
Managers respond to IO attention by increasing the number of forecasts and 8-K filings, in instances where IO was constant and controlling for industry-quarter effects. IO attention caused minor adjustments to disclosures rather than impacting managers’ decision whether to forecast or release more informative disclosures. Passive investors were identified as the key driver behind these changes to disclosures, which explains the increased quantity of disclosures; however, this was not found to effect the abnormal volume and volatility, the bid-ask spread or depth.
The evidence presented by the authors indicates that management responds to temporary institutional investor attention by making disclosures that have little effect on information quality or liquidity. These findings extend prior research into the effectiveness of passive IO monitoring.
Read full paper: Abramova, I., J. Core, and A. Sutherland. 2020. “Institutional Investor Attention and Firm Disclosure.” The Accounting Review Forthcoming https://doi.org/10.2308/tar-2018-0494