Can Disclosure Decrease Price Efficiency?
59 Pages Posted: 10 Nov 2017 Last revised: 15 Feb 2019
Date Written: February 13, 2019
We propose a novel measure of window dressing by fund managers—reduced price efficiency—and document returns reverse 28% more in the 30 days after funds record their holdings for required portfolio disclosures, consistent with an overall drop in price efficiency. Asset pricing anomalies also earn negative returns on disclosure dates, consistent with window dressing leading prices to diverge from fundamental value. We further link our findings to fund-level trades by showing that mutual fund managers are more likely to reverse trades initiated on disclosure days and less likely to pay commissions for information on those days. We also show that volume increases on disclosure days and that return reversals are largest among stocks with larger increases in volume, consistent with increases in demand for securities driving the observed distortions. Combined, these findings suggest that mandated fund disclosures have the unintended consequence of decreasing price efficiency in equity markets.
Keywords: Mandatory Disclosure, Return Reversal, Market Efficiency, Price Pressure
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