Institutional Ownership and Corporate Voluntary Disclosure: The Myopia View

• In Event: Disclosure

Abstract

How does managerial myopia affect voluntary disclosures? In this paper, we exploit SEC regulation in May 2004 that requires mutual funds to report holdings more frequently as an exogenous shock that increases managerial myopia of portfolio firms, and study how issuance of management guidance changes after the regulation. With a dif-in-dif research design, firms with higher mutual fund ownership are more likely to issue managerial guidance following the regulatory change, especially for the bad news. In addition, the guidance become more precise, target at longer horizon, and more likely to follow the optimistic-pessimistic pattern. For firms with higher mutual fund ownership, they are more likely to meet or beat street earnings target when they issue pessimistic EPS guidance for current quarter. In the cross-sectional analysis, the relation is stronger when the mutual fund ownership is more sensitive to change in earnings, when the stock volatility is higher, and when the CEO is more likely to be short-visioned, i.e., when the CEO is with shorter tenure, and when the CEO is not the founder of the firm. These findings have implications over the causal relation between managerial myopia and voluntary disclosing decisions, and how investors’ transparency requirement affects firm’s information production.

Author

• Ivy Wang, Washington University in St Louis