Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring

Andrés Almazán · Sanjay Banerji · Adolfo de Motta

76 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Financial Markets and Investment Strategies Auditing, Earnings Management, Governance

Abstract

ABSTRACT We provide a theory of informal communication—cheap talk—between firms and capital markets that incorporates the role of agency conflicts between managers and shareholders. The analysis suggests that a policy of discretionary disclosure that encourages managers to attract the market's attention when the firm is substantially undervalued can create shareholder value. The theory also relates the credibility of managerial announcements to the use of stock‐based compensation, the presence of informed trading, and the liquidity of the stock. Our results are consistent with the existence of positive announcement effects produced by apparently innocuous corporate events (e.g., stock dividends, name changes).

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References

1973Job Market Signaling 1985Continuous Auctions and Insider Trading 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 1980On the Impossibility of Informationally Efficient Markets 1982Strategic Information Transmission 1977The Determination of Financial Structure: The Incentive-Signalling Approach 1997Financial Intermediation, Loanable Funds, and The Real Sector 1980On the Impossibility of Informationally Efficient Markets

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