Abstract

http://ssrn.com/abstract=687485
 
 

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Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring


Andres Almazan


University of Texas at Austin - Department of Finance

Sanjay Banerji


Durham University - Durham Business School

Adolfo De Motta


McGill University - Desautels Faculty of Management

June 10, 2005

AFA 2006 Boston Meetings Paper

Abstract:     
This paper provides a theory of informal communication (cheap talk) between firms and the capital market. The theory emphasizes the central role that agency conflicts play in firms' disclosure policies. Since managers' information is a consequence of their actions, incentive compensation and information disclosure become two intrinsically linked aspects of corporate governance. In the model, the information disclosed by managers attracts market attention and guides investors in their investigation efforts. Optimal incentive compensation, however, discourages managers from attracting market attention unless the firm is severely undervalued. The analysis relates the credibility of managerial announcements to the use of stock based compensation, the presence of informed trading, and the level of liquidity in the market. The study can also explain why apparently innocuous corporate events (e.g., a stock dividend or a name change) can affect a firm's stock price, and suggests that an adequate use of incentive compensation can foster the communication of managerial information to the market.

Number of Pages in PDF File: 41

Keywords: Executive compensation, information production, market attention

JEL Classification: G14, G30, G34, G39

working papers series


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Date posted: March 17, 2005  

Suggested Citation

Almazan, Andres and Banerji, Sanjay and De Motta, Adolfo, Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring (June 10, 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=687485 or http://dx.doi.org/10.2139/ssrn.687485

Contact Information

Andres Almazan (Contact Author)
University of Texas at Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
512-471-4368 (Phone)
512-471-5073 (Fax)
HOME PAGE: http://www.mccombs.utexas.edu/dept/finance/faculty/profiles/index.asp?addTarget=4
Sanjay Banerji
Durham University - Durham Business School ( email )
Mill Hill Lane
Durham, DH1 3LB
United Kingdom
+44-191-334-6336 (Phone)
+44-191-334-6341 (Fax)
Adolfo De Motta
McGill University - Desautels Faculty of Management ( email )
1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
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