Quantifying Investor Pressure

Abstract

How do investor preferences translate to changes in firm actions? We develop a firm-, time-, and topic-specific measure of investor preferences and their divergence from firm priorities using earnings call transcripts. This measure, which we call the "focus gap," captures the difference in attention to a given topic between the Q&A, which proxies for investor priorities, and the firm's presentation, which reflects firm executives' priorities. We show that the focus gap predicts firm actions. Specifically, a one standard deviation increase in the dividend focus gap is associated with a 0.4 p.p., or 4%, increase in dividends paid as a percent of firm market value within two years. The analogous repurchase focus gap raises repurchases made as a percent of firm market value by 0.3 p.p., or 2%, within one year, but reverts to zero by two years after the focus gap increase. We then develop a conceptual framework that generates two possible rationales for responsiveness to investor pressure: catering to increase short-term stock prices and learning about long-run value. Variation in incentives to cater to analysts suggests that catering to raise stock prices, as opposed to learning, drives responsiveness to the focus gap for dividend issuance and repurchases. Consistent with this interpretation, we find that focus gap-driven capital allocation decisions are associated with temporary stock price increases followed by subsequent reversals.

Keywords: investor pressure, governance, corporate payout policy