Management Forecasts and Competition for Limited Investor Resources

Abstract

This paper documents a dual role for disclosure. In addition to the traditional role of alleviating information asymmetry, firms are motivated to disclose to attract limited investor resources and order flow away from other firms (Fishman and Hagerty, 1989). Higher competition for investors increases the incentive to disclose, but the resulting excessive disclosure implies diminishing marginal returns to disclosure. Consistent with this investor-seeking role for disclosure, we find that when firms compete more for investors, they issue more guidance, especially capital expenditure forecasts. The guidance increases liquidity and price efficiency, but the effects decrease as guidance serves more of an investor-seeking role.

Keywords: comovement, disclosure, guidance, management forecasts, information acquisition

JEL Classification: G1, M4