How Stricter Disclosure Rules for Private Meetings Affect Stock Price Informativeness and Volatility

Private meetings between management and investors occur worldwide and are generally held at corporate headquarters with invited investors and sell-side analysts (a.k.a., site visits).  Ng and Troianovski (WSJ, 2015) report that U.S. investors pay $1.4 billion a year to securities firms that can arrange face time with executives.  These meetings differ from other management-investor interactions such as investor conferences and analyst or investor days in that they are generally not publicized in advance and their content may never become public unless hosting firms are required to publish the meeting details by regulation.  Since 2009, the Shenzhen Stock Exchange (SZSE) in China has been the only regulatory entity to require their once-a-year disclosure in annual reports, including who participates and a brief summary of what they talk about.  The SZSE tightened these regulations in July 2012 to require disclosure within two business days after a private site visit.  Thus, the SZSE provides a unique setting to examine the consequences of enforcing stricter disclosure regulation of private meetings.

We first examine whether the new post-July 2012 disclosure regime led to more and better information being available to investors.  We use stock price volatility and information efficiency as our market-based measures (Francis et al., 2006).  Our results are consistent with degradation (rather than improvement) of the quality and availability of information for SZSE firms.  Stock price volatility increased while stock price informativeness declined around both private meeting dates and subsequent earnings announcement dates in the post-July 2012 period for SZSE firms (relative to Shanghai Stock Exchange firms that had no required disclosure of site visits).

Second, we investigate whether the July 2012 change in disclosure requirements affected the disclosure behavior of SZSE listed firms.  We find that the content of private meetings was more positive (i.e., a stronger market reaction and a more positive tone in the published meetings reports) after the July 2012 SZSE regulation.  As important, we find that positive signals revealed through private meetings became less informative in predicting future earnings.

Third, we expect the demand for private meetings from institutional investors with relatively large ownership in the meeting firm to decrease post-July 2012 because they are (i) less likely to get an honest portrayal of the firm’s economics in these semi-public meetings and (ii) more likely to have other private channels.  In contrast, we expect the demand for private meetings from investors with little or no ownership to increase because (i) these investors are attracted to positive news and (ii) they don’t benefit (as much) from learning about negative news due to their small holdings and restraints from short selling in China.  We find an overall increase in mutual fund participation in private meetings after the July 2012 SZSE regulation.  When private meeting information is relatively positive, meetings are more likely to be attended by mutual funds with little or no ownership in the firm.  We also find that participation by mutual funds is associated with higher meeting-date and post-publication-date stock price volatility, and this effect is stronger for positive-news meetings.  Overall, we believe that, because of the increased visibility of these private meetings after the enhanced July 2012 disclosure requirements, at least some SZSE listed firms turned private meetings into promotional events that highlighted positive prospects (while withholding negative content).  This degradation of stock price informativeness is likely driven by the changing composition of mutual funds attending private meetings, especially the 90 percent of participating mutual funds with little or no ownership in the meeting firms.

Our study makes several contributions.  First, existing studies of private meetings (e.g., Cheng et al., 2016, 2019; Han et al., 2018; Bowen et al., 2018) do not take advantage of changing SZSE disclosure requirements and thus do not consider potential changes in (i) the overall stock market informativeness and volatility and (ii) the effect of greater disclosure mandated in July 2012 on firm and investor behavior.  Second, we can draw stronger causal inferences on the effects of changing private meeting disclosure regulation because of an improved research design that takes advantage of (i) staggered changes in SZSE disclosure regulation of private meetings and (ii) the fact that Shanghai Stock Exchange firms were not affected by these new disclosure requirements.  Third, while prior studies (e.g., Francis et al., 2006) have examined the effect of changes in disclosure regulation on the quality and availability of information in the stock market, few have attempted to explain the mechanisms that link regulatory changes to firm and investor behavior.  In contrast, we study a mechanism based on changes in firms’ disclosure behavior and changes in investor behavior after the enhanced July 2012 SZSE regulation.  Finally, we summarize the pros and cons of the SZSE’s stricter disclosure regulation.  While some have called for other regulatory jurisdictions to adopt SZSE’s disclosure requirements, we identify ongoing issues around the existence of private meetings that were not mitigated by the July 2012 disclosures.  On the positive side, access to private meetings appeared to increase post-July 2012, especially for mutual funds with little or no prior ownership in the firm.  However, the new post-July 2012 disclosure regime appears to have changed the disclosure behavior of listed firms and turned at least some private meetings into promotional events.  Attracting mutual funds with little or no prior ownership who have less experience and knowledge about listed firms may trigger less informative stock trades and lower stock price informativeness.

Although Chinese stock markets differ from western markets in significant ways (such as weaker corporate governance, less institutional investment, weaker legal systems and enforcement to protect minority investors, and dominant state controls), our research provides direct evidence of the pervasiveness of private meetings and sheds light on the potential costs and benefits associated with additional disclosure regulation.  This evidence might be useful for other regulatory jurisdictions that are considering similar disclosure policy.

REFERENCES

Bowen, R. M., S. Dutta, S. Tang and P. Zhu. 2018. Inside the “black box” of private in-house meetings. Review of Accounting Studies 23: 487–527.

Bowen, R. M., S. Dutta, S. Tang and P. Zhu. 2020. Does stricter disclosure regulation of private meetings improve the information environment? Working paper, Chapman University, University of Ottawa, East China University of Science and Technology, and University of San Diego. Available at SSRN: https://ssrn.com/abstract=3723824.

Cheng, Q., F. Du, X. Wang, and Y. Wang. 2016. Seeing is believing: analysts’ corporate site visits. Review of Accounting Studies 21: 1245-1286.

Cheng, Q., F. Du, X. Wang, and Y. Wang. 2019. Do corporate site visits impact stock prices? Contemporary Accounting Research 36: 359-388.

Francis, J., D. Nandaa, and X. Wang. 2006. Re-examining the effects of regulation fair disclosure using foreign listed firms to control for concurrent shocks. Journal of Accounting and Economics 41: 271–292.

Han, B., D. Kong, and S. Liu. 2018. Do analysts gain an informational advantage by visiting listed companies? Contemporary Accounting Research 35: 1843-1867.

Ng, S. and A. Troianovski. 2015. How some investors get special access to companies. The Wall Street Journal. September 27.

This post comes to us from professors Robert M. Bowen at Chapman University and the University of Washington, Shantanu Dutta at the University of Ottawa, Songlian Tang at East China University of Science and Technology, and Pengcheng Zhu at the University of San Diego.  It is based on their recent paper, “Does Stricter Disclosure Regulation of Private Meetings Improve the Information Environment?” available here.

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