Mandatory Disclosure and Peer Firm Managers’ Learning from Stock Prices

Abstract

Research suggests that mandatory disclosure hinders managers’ ability to learn from their own stock prices in making investment decisions. We build on this research by examining how mandatory disclosure impacts the learning of managers of peer firms. Using the introduction of mandatory segment disclosure under SFAS 131, we document a significant decrease in investment-q sensitivity for peer firms, suggesting decreased investment efficiency. We also find that the decrease in sensitivity is concentrated among peers with lower financial constraints and higher informed trading, as well as those with greater economic links to disclosing firms. Collectively, our findings suggest that mandatory disclosure interferes with peer firm managers’ learning from their own stock prices. We provide novel evidence that mandatory disclosure has negative externalities to peer firms’ investment.