Disclosure and Investor Inattention: Theory and Evidence
49 Pages Posted: 30 Sep 2020 Last revised: 29 Oct 2022
Date Written: August 13, 2020
Investors have a finite capacity to organize all information they receive from financial disclosures. Under rational inattention, we show that investor processing capacity affects the probability of disclosure. Our main result is that the likelihood of disclosure is inverse U-shaped in investor attention: for low levels of attention, more attention facilitates communication and increases disclosure; for high levels of attention, more attention better identifies, and therefore deters, unfavorable voluntary disclosures. We provide empirical evidence that the relationship between investor attention and management forecast follows the predictions of the theory, using institutional ownership as a proxy for investor attention as well as exogenous shocks to fund manager distraction.
Keywords: disclosure, inattention, constraints, communication, voluntary, theory
JEL Classification: D83, G14, M4
Suggested Citation: Suggested Citation