The Dog that Didn't Bark: Limited Price Efficiency and Strategic Nondisclosure
58 Pages Posted: 7 Aug 2017 Last revised: 30 Jan 2020
Date Written: December 23, 2019
Theory posits that investors can rationally infer the implications of strategic nondisclosure for firm value, pressuring managers to voluntarily disclose information. This study documents that the lack of an earnings guidance predicts an abnormal return of -41 basis points around the subsequent quarterly earnings announcement, suggesting that investors do not fully incorporate the implications of nonguidance. Further analyses demonstrate that limitations in price efficiency, driven by investors' limited attention and short-selling constraints, explain the mispricing of nonguidance and are associated with less guidance issuance. Our results collectively highlight limited price efficiency as another friction when studying managers' strategic disclosure decisions.
Keywords: Mispricing of Nonguidance; Limited Attention; Short-selling Constraints; Voluntary Disclosure
JEL Classification: G14; M41
Suggested Citation: Suggested Citation