Alex Edmans

London Business School – Institute of Finance and Accounting; University of Pennsylvania – The Wharton School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Luis Goncalves-Pinto

National University of Singapore

Yanbo Wang

INSEAD

Moqi Xu

London School of Economics & Political Science (LSE)

August 29, 2014

NBER Working Paper No. w20476

ECGI Working Paper

Abstract:

We show that CEOs strategically time corporate news releases to coincide with months in which their equity vests. These vesting months are determined by equity grants made several years prior, and thus unlikely driven by the current information environment. CEOs reallocate news into vesting months, and away from prior and subsequent months. They release 5% more discretionary news in vesting months than prior months, but there is no difference for non-discretionary news. These news releases lead to favorable media coverage, suggesting they are positive in tone. They also generate a temporary run-up in stock prices and market liquidity, potentially resulting from increased investor attention or reduced information asymmetry. The CEO takes advantage of these effects by cashing out shortly after the news releases.

Strategic News Releases: Introduction

The timely release of information is central to the efficiency of both financial markets and the real economy. Information can in influence real decisions either directly, or indirectly via affecting stock prices which agents use as signals (see the survey of Bond, Edmans, and Goldstein (2012)). For example, suppliers, employees, and investors may base their decision of whether to initiate, continue, or terminate their relationship with a rm on news releases, or stock prices that are affected by news.

News can also have distributional as well as efficiency effects. In particular, news reduces information asymmetry between investors, thus protecting uninformed investors from trading losses. Indeed, Regulation FD aims to level the playing eld” between investors by restricting selective disclosure. Moreover, these distributional consequences in the secondary market may feed back into eciency consequences in the primary market. Uninformed investors, who expect future trading losses due to information asymmetry, may withdraw from the market (Bhattacharya and Spiegel (1991)) or require a higher cost of capital (Diamond and Verrecchia (1991)), in turn hindering investment.

Timely information flows are thus important. Subsequent to Regulation FD in October 2000 and Sarbanes-Oxley in July 2002, corporate news releases have been particularly important in communicating new information to investors (Neuhierl, Scherbina, and Schlusche (2013)). News releases do not occur mechanically whenever corporate events take place, but are a discretionary decision of the CEO. This paper investigates whether CEOs strategically time news releases for personal gain. Speci cally, we hypothesize that a CEO who intends to sell equity in a given month will delay otherwise past news releases until that month, and accelerate otherwise future news releases into that month. This is because disclosure can temporarily boost the stock price through two channels. First, disclosure can attract investor attention. Barber and Odean (2008) argue that investors need to browse through thousands of stocks when making a buy decision, and so are particularly likely to buy attention-grabbing stocks. They indeed nd that retail investorsare net buyers of such stocks, and Da, Engelberg, and Gao (2011) show that such buying leads to temporary price increases. Second, disclosure can reduce information asymmetry between investors, encouraging uninformed investors to buy the stock and raising its price. Indeed, Balakrishnan, Billings, Kelly, and Ljungqvist (2014) nd that voluntary disclosures increase liquidity and thus firm value. Separately, in addition to releasing a greater volume of news, the CEO may also release more favorable news.

However, documenting that CEOs disclose more (favorable) news in months in which they sell equity would not imply a causal relationship from equity sales to disclosure, because the decision to sell equity is endogenous. For example, if a particular month happens to coincide with many favorable events, the CEO will undertake many positive news releases (even in the absence of strategic considerations) and take advantage of any resulting stock price increase by opportunistically selling equity. Thus, disclosure causes equity sales rather than expected equity sales causing disclosure.

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