More Frequent Financial Reporting and Market Feedback Effect: Evidence from U.S. And EU Regulatory Changes

Abstract

We examine the effect of mandatory financial reporting frequency on corporate investment decisions using hand-collected data from U.S. public firms that experienced reporting frequency changes between 1950 and 1974. Using a generalized difference-in-differences design, we find that investment-to-stock-price sensitivity (IPS) increases following increased reporting frequency, suggesting that more frequent reporting enhances the informational role of stock prices, enabling managers to make better-informed investment decisions. Consistent with this mechanism, we document a post-adoption increase in profitability, an effect that persists only in firms with high levels of privately informed trading. The increase in IPS is most pronounced among firms with higher private information-based trading and growth-oriented firms, which rely more on external market signals. We find no evidence that the IPS increase is driven by reduced financial constraints or a lower cost of capital. To test the generalizability of our findings, we examine the European Union’s 2007 mandate requiring interim management statements between semi-annual reports. Results show a similar IPS increase in affected firms, reinforcing the robustness of our conclusions. Our findings demonstrate that reporting frequency influences corporate investment decisions, contributing to regulatory debates on financial reporting mandates. The results highlight trade-offs between enhanced stock market feedback and potential managerial myopia, offering insights into the broader implications of financial reporting frequency.

Keywords: financial reporting frequency, investment-to-price sensitivity (IPS), market feedback, stock price informativeness