Financial Reporting Frequency and Managerial Learning from Stock Price

Abstract

Using hand-collected data on changes in public firms’ financial reporting frequency over the peirod 1951-1974, we provide evidence that increased reporting frequency enhances the extent to which stock price guides managers’ investment decisions. Using a generalized differencein-differences research design, we find the sensitivity of investment to stock price (measured by Tobin’s Q) increased for treatment firms following an increase in reporting frequency, relative to control firms. The results are more pronounced among firms traded by more informed investors, measured by price nonsynchronicity and stock illiquidity. Consistent with managers making better investment decisions when stock prices provide more investment-relevant information, we find future operating performance of the treatment firms improves following the increase in reporting frequency. Our findings are consistent with the “crowding-in effect” theorized in Goldstein and Yang (2019). Our results are relevant to the ongoing regulatory debates in the United States and European Union regarding how frequently firms should be required to report their financial results.