“Disclosure Regulations, Myopic Pressures and Managerial Signalling: Evidence from Changes in Mutual Fund Reporting Frequency” by Prof. Lakshmanan Shivakumar
Prof. Lakshmanan Shivakumar
Lord David Sainsbury of Turville Professor
Professor of Accounting
London Business School
A stated cost of frequent disclosures is that it creates pressures from investors to report better shortrun performance and forces managers to behave myopically. We investigate whether managers can resist such pressures by buying their firm’s shares on personal account to signal long-term value. Such purchases could be particularly credible as signals of long-term value since regulations prevent managers from profiting on short-term price swings. Using a 2004 SEC regulation that required more frequent disclosures by mutual funds and has been shown by prior research to induce corporate myopia, we find an increase in both the intensity and profitability of net share purchases by managers. In cross-sectional tests, we find that this effect is stronger for firms that undertook larger investments immediately prior to 2004 and is weaker for firms whose CEOs are more susceptible to myopic pressures. Moreover, this effect is not driven by liquidity changes or changes in the opportunities for insiders to learn from fund disclosures. While the greater profitability could reflect insiders’ opportunism, our findings are consistent with insider trading by managers to lean against short-term pressures exerted by myopic investors affected by the SEC regulation.