Institutional Investor Attention and Firm Disclosure

Abstract

We study how short-term changes in institutional owner attention affect managers' disclosure choices. Holding institutional ownership constant and controlling for industry-quarter effects, we find that managers respond to attention by increasing the number of forecasts and 8-K filings. Rather than alter the decision of whether to forecast or to provide more informative disclosures, attention causes minor disclosure adjustments. This variation in disclosure is primarily driven by passive investors. Although attention explains significant variation in the quantity of disclosure, we find little change in abnormal volume and volatility, the bid-ask spread, or depth. Overall, our evidence suggests that management responds to temporary institutional investor attention by making disclosures that have little effect on information quality or liquidity.

The Dog that Did Not Bark: Limited Price Efficiency and Strategic Nondisclosure

“…They interpret the results as institutional investors' demand for information. Abramova, Core, and Sutherland [2019] show that events that distract institutional investors' attention cause minor disclosure adjustments. Our evidence that investors do not correctly respond to the implication of nonguidance provides supporting evidence for investor sophistication being one of the reasons why information is withheld.…”

A new take on voice: the influence of BlackRock’s ‘Dear CEO’ letters

“…We also contribute to the literature that links institutional ownership to portfolio firms' disclosure attributes. For example, Abramova et al (2020) and Basu et al (2019) find that firms respond directly to institutional owners' spotlight by increasing the provision of voluntary disclosure and improving the quality of non-GAAP disclosures. In contrast to existing research, our evidence suggests that BlackRock's broad-based public engagement is a mechanism through which institutional owners may influence the narrative of portfolio firm's disclosures.…”

Distracted institutional investors and audit risk

“…The institutional investor distraction measure provides a way to measure exogenous variation in institutional investor monitoring intensity (attention), while holding the number of institutional investors and their shareholdings constant (Kempf et al ., 2017; Abramova et al ., 2020; Liu et al ., 2020). First, this measure relies on extreme economic shocks arising in other industries, which by construction, are not associated with fundamentals of the focal firm.…”

“…First, this measure relies on extreme economic shocks arising in other industries, which by construction, are not associated with fundamentals of the focal firm. Second, it explores the fact that investors’ attention on firms in the same industry is differentially impacted by shocks in other industries, due to variations in investor bases and investors’ portfolio compositions (Kempf et al ., 2017; Abramova et al ., 2020). Kempf et al .…”

“…Second, our results contribute to the growing research documenting the effect of institutional investor distraction/attention on various managerial decisions, including dividend and investment (Kempf et al ., 2017), voluntary disclosure (Basu et al ., 2019; Abramova et al ., 2020), CEO compensation (Kempf et al ., 2017; Liu et al ., 2020), earnings management (Garel et al ., 2019; Liu et al ., 2020) and tax avoidance (Li et al ., 2016). Our study complements these studies by showing that auditors, as another monitoring party, recognise the increased audit risk from institutional investor distraction and increase their efforts accordingly.…”