The Impact of Tightly Contested Governance Proposals on Firms' Narrative Disclosures: Evidence from a Regression-Discontinuity Design (RDD)

Abstract

Corporate governance and disclosure are endogenously determined. We exploit locally exogenous variations in corporate governance created by “close-call” governance-related shareholder proposals to examine whether the narrow passing of such proposals causally affects the narratives in disclosures. We find that the passage of governance-related proposals within the 5% bandwidth at the 50% threshold significantly increases the textual similarity in the narratives of 10-Ks. Moreover, firms that narrowly passed governance-related proposals within the 10% bandwidth also disclosed more with increased accounting complexity and poor readability, providing empirical support to the models that treat better governance and disclosures as substitutes rather than complements.

Keywords: Corporate governance, Textual Disclosure, Endogeneity, Regression Discontinuity Design (RDD), Computational Linguistics, Investor Distraction

JEL Classification: G23, G30, G34