Disclosure and Investor Inattention

68 Pages Posted: 30 Sep 2020 Last revised: 11 Feb 2021

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

Washington University in St. Louis - John M. Olin Business School

Keri Peicong Hu

University of California

Yibin Liu

Business School, National University of Singapore

Date Written: August 13, 2020

Abstract

Investors have a finite capacity to organize all information they receive from financial disclosures. In a model of rational inattention, we show that investor attention capacity affects the probability of disclosure. In the model, an informed firm makes a strategic voluntary disclosure subject to proprietary costs (Verrecchia 1983) or uncertainty about information endowment (Dye 1985), investors optimally allocate their attention as a function of their conjectures about the disclosure strategy. Our main result is that the probability 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 disclosure. We provide preliminary empirical evidence that the relationship between investor attention and management forecast is concave and inverse U-shaped, using institutional ownership as a proxy for investor attention.

Keywords: disclosure, inattention, constraints, communication, voluntary, theory

JEL Classification: D83, G14, M4

Suggested Citation

Bertomeu, Jeremy and Hu, Keri Peicong and Liu, Yibin, Disclosure and Investor Inattention (August 13, 2020). Available at SSRN: https://ssrn.com/abstract=3673225 or http://dx.doi.org/10.2139/ssrn.3673225

Jeremy Bertomeu (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Keri Peicong Hu

University of California ( email )

540 Alumni Ln
Davis, CA 95616
United States

Yibin Liu

Business School, National University of Singapore ( email )

HOME PAGE: http://bizfaculty.nus.edu.sg/faculty-details/?profId=699

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