Does the Arrival of Investment Opportunities Promote or Deter Firm Disclosures? Evidence from Medicare National Coverage Decisions

Abstract

Although the arrival of investment opportunities increases the demand for information, it is also likely to exacerbate disclosure costs. This study examines the relationship between the arrival of investment opportunities and firm disclosures in the context of Medicare national coverage decisions (NCD), which create staggered changes to the investment opportunities available to different subsets of firms in the medical device industry. Consistent with disclosure costs being the dominant effect, we find that NCD approvals are associated with reductions in management forecasts, disclosures about R&D, and product-related announcements. Additional cross-sectional analyses suggest that greater reputation and proprietary cost concerns are important determinants of this negative association. We find that information intermediaries increase their coverage of firms following NCD approvals. Yet, overall, the greater investment opportunities due to NCD approvals appear to have a negative effect on firms’ information environment: NCD approvals are followed by higher analyst forecast dispersion, greater bid-ask spreads, and decreased stock liquidity.

Keywords: Voluntary disclosure, Investment opportunities, Medicare national coverage decisions, Financial intermediaries, Information environment

JEL Classification: D82, D83, G19, M40, M41