“Investor Horizon and Corporate Production of Short-Term Information: Evidence from Mutual Fund Portfolio Disclosure Reform?” by Prof. Yinghua Li
Professor Yinghua Li
Professor of Accountancy
W. P. Carey School of Business
Arizona State University
Using the May 2004 SEC regulatory mandate of more frequent portfolio disclosure by mutual funds, we examine how an exogenous shock that intensifies investor preference for near-term profits induces investee firms to adjust their production of short-term information. We find that firms with larger mutual fund ownership exhibit greater increases in the frequency of short-horizon management forecasts after the reform. The increase in short-term management forecasts is more strongly linked to mutual fund ownership when fund managers are subject to greater career concerns, and when they devote more attention to the stock. Results are also stronger when corporate executives are more likely to capitulate to mutual fund influence, when there is a weak presence of dedicated institutional investors who are not affected by the reform, and when boards are comprised of fewer independent directors. More disconcertingly, we observe deterioration in management guidance quality, implying non-negligible costs and undue burdens associated with the escalated production of short-term information. These results provide causal evidence on how institutional investors’ time preferences drive firms’ guidance policies.