Investor Attention and Disclosure Effectiveness

Abstract

In this paper, we analytically examine firms’ joint decisions to affect the informativeness of their key performance indicators (KPIs) and the accessibility of their supplementary disclosures (e.g., MD&A) when it is costly for investors to analyze the latter. We show that while disclosure accessibility can help investors extract information in supplementary disclosure to assess the informativeness of reported KPIs, its usefulness can also endogenously limit its supply. We analyze how the equilibrium level of disclosure accessibility is affected by the degree of information asymmetry between a firm and its investors, the accuracy of mandatory disclosure, and the degree of disclosure complexity. Our analyses provide a framework to evaluate policies and proposals aimed at improving investors’ understanding of firm disclosure.