Can Disclosure Decrease Price Efficiency? Evidence from Mutual Fund Disclosures

• In Event: Disclosure and Asset Pricing

Abstract

We examine the consequences of mandatory disclosure of mutual funds’ portfolio holdings and the resulting window dressing on the information content of security prices. We document that the disclosure of portfolio holdings is associated with an increase in stock return noise. Returns reverse on disclosure days 38% more over the subsequent 30 days than on the average day when no disclosure takes place. We also show that several asset pricing anomalies earn negative returns, consistent with the noise in returns leading prices to diverge from fundamental value. The findings are larger in more liquid stocks, suggesting the lower trading costs induce more low information content trades and greater distortion in asset prices. These results demonstrate that mandated disclosure may have the unintended consequence of decreasing price efficiency in equity markets.

Authors

• Zachary R Kaplan, Washington University

• Aadhaar Verma, Washington University in St. Louis

• Todd Gormley, Washington University in St. Louis