Strategic Disclosure Misclassification

• In Event: Strategic Disclosure

Abstract

We apply modern machine learning techniques to characterize disclosure misclassification by public companies. We find that 12-25% of disclosures are misclassified; those concerning material definitive agreements, executive or director turnover, and delistings are most commonly misclassified. Using EDGAR search traffic data, we provide evidence that misclassification successfully reduces investor attention. Through this attention channel, misclassification leads to a significant and persistent impact on absolute market returns. For misclassified filings, search traffic
is 4-12% lower and absolute market reactions are 46-79 bps smaller. Consistent
with strategic motives, misclassification is more likely for negative news and when
market attention is high.

Authors

• Paul Ma, University of Minnesota-Minneapolis

• Stephen Adam Karolyi, Carnegie Mellon University

• Andrew Bird, Carnegie Mellon University