Download this Paper Open PDF in Browser

Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring

41 Pages Posted: 17 Mar 2005  

Andres Almazan

University of Texas at Austin - Department of Finance

Sanjay Banerji

Durham University - Durham Business School

Adolfo De Motta

McGill University - Desautels Faculty of Management

Date Written: June 10, 2005

Abstract

This paper provides a theory of informal communication (cheap talk) between firms and the capital market. The theory emphasizes the central role that agency conflicts play in firms' disclosure policies. Since managers' information is a consequence of their actions, incentive compensation and information disclosure become two intrinsically linked aspects of corporate governance. In the model, the information disclosed by managers attracts market attention and guides investors in their investigation efforts. Optimal incentive compensation, however, discourages managers from attracting market attention unless the firm is severely undervalued. The analysis relates the credibility of managerial announcements to the use of stock based compensation, the presence of informed trading, and the level of liquidity in the market. The study can also explain why apparently innocuous corporate events (e.g., a stock dividend or a name change) can affect a firm's stock price, and suggests that an adequate use of incentive compensation can foster the communication of managerial information to the market.

Keywords: Executive compensation, information production, market attention

JEL Classification: G14, G30, G34, G39

Suggested Citation

Almazan, Andres and Banerji, Sanjay and De Motta, Adolfo, Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring (June 10, 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=687485 or http://dx.doi.org/10.2139/ssrn.687485

Andres Almazan (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-4368 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/dept/finance/faculty/profiles/index.asp?addTarget=4

Sanjay Banerji

Durham University - Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom
+44-191-334-6336 (Phone)
+44-191-334-6341 (Fax)

Adolfo De Motta

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Paper statistics

Downloads
356
Rank
70,684
Abstract Views
3,183