Large Shareholder Diversification and Corporate Voluntary Disclosures

• In Event: Diversification

Abstract

This study uses a recently available dataset, that tracks investors’ equity holdings across the globe, to investigate the relation between large shareholders’ acquisition of equity in multiple firms (i.e., diversification) and managers’ voluntary disclosure practices. Although large shareholders are traditionally viewed as investors with sufficient resources to engage in costly private information acquisition, we highlight an instance in which these resources become constrained: when shareholders invest in multiple firms. We posit that resource constraints impede diversified large shareholders’ ability to acquire private information about firms. Given that these shareholders need information in order to adequately monitor insiders and deter rent extraction, we expect the shareholders to instead demand less costly voluntary disclosures from management. Consistent with this expectation, we find that large shareholder portfolio diversification relates positively to voluntary disclosure quantity as measured by the incidence and the frequency of management forecasts, conference calls, analyst investor days and product-related announcements. Consistent with shareholders’ heightened demand for disclosures for monitoring purposes, the relation between large shareholder portfolio diversification and voluntary disclosure quantity is more pronounced when risk of insider private benefit extraction is greater (i.e., high self-dealing and high corruption). Also, the positive relation between large shareholder diversification and corporate voluntary disclosure is mitigated when managers have less incentive to supply public information (weak rule of law and more secretive culture). Finally, we find that firms catering to large diversified shareholders’ demand for voluntary disclosures have higher industry-adjusted return on assets and lower propensity to pay dividends. This result is consistent with firms’ provision of high quality disclosures that facilitate monitoring leading to improved performance and decreased use of dividends as a mechanism to curb rent extraction.

Authors

• Herita Akamah, University of Oklahoma

• Sydney Qing Shu, University of Oklahoma