Disclosure and Investor Inattention: Theory and Evidence

49 Pages Posted: 30 Sep 2020 Last revised: 29 Oct 2022

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

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

Keri Peicong Hu

Faculty of Business and Economics, The University of Hong Kong

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. 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

Bertomeu, Jeremy and Hu, Keri Peicong and Liu, Yibin, Disclosure and Investor Inattention: Theory and Evidence (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

Faculty of Business and Economics, The University of Hong Kong ( email )

Hong Kong
China
(852) 3910 2408 (Phone)

HOME PAGE: http://https://www.hkubs.hku.hk/people/keri-peicong-hu/

Yibin Liu

Business School, National University of Singapore ( email )

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

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