Strategic Disclosure Misclassification

Abstract

We apply modern machine learning techniques to characterize disclosure misclassification by public companies. We find that 12-26% of disclosures are misclassified; those concerning material definitive agreements, executive or director turnover, and delistings are most commonly misclassified. Using EDGAR search traffic data, we provide evidence that misclassification is associated with less investor attention. Through this attention channel, misclassification leads to a significant and persistent impact on absolute market returns. For misclassified filings, search traffic is 4-12% lower and absolute market reactions are 46-79 bps smaller. Consistent with strategic motives, misclassification is more likely for negative news and when market attention is high.

Keywords: Information Overload; Materality Threshold; Disclosure Misclassification; Voluntary Disclosure; 8-K; Latent Dirichlet Allocation

JEL Classification: D83, G14, M48