Investor Horizon and Disclosure Policies

Abstract

We investigate the relation between investor horizon and disclosure policy. We develop and analyze a rational expectations model where the original investors commit to a disclosure policy. Counter to casual intuition, short-horizon investors prefer more disclosure and are willing to bear costs of disclosure to reduce information asymmetries among capital market participants. We empirically test our predictions in the setting of newly public firms and find that firms with short-horizon controlling investors disclose more than other firms and experience lower information asymmetry. Our study contributes to the understanding of firms' disclosure choices by suggesting that the horizon of controlling investors shapes a firm's disclosure policy.

Keywords: Investment Horizon, Voluntary Disclosure, Disclosure Policy, IPO

JEL Classification: M40, G14, G24