Since the passage of Regulation Fair Disclosure, managers have increasingly met privately with investors. During these meetings, investors gather useful information by seeking managers’ feedback, pursuing a deeper understanding of publicly available information, and inquiring about company strategy. That information can help them better interpret subsequent disclosures. In a new study, we investigate whether investor activity around earnings announcements is consistent with the leveraging of a mosaic of soft information obtained from private meetings and subsequently forecasted earnings announcements.

We compare firms that issue stand-alone management guidance in conjunction with private investor meetings with a sample of firms that issue stand-alone guidance but do not have such meetings. We then investigate the implication of private meetings with investors for investor uncertainty around the subsequently forecasted earnings announcement. We focus on investor uncertainty because a social value of accounting is to help resolve investor uncertainty about firm fundamentals. If an information mosaic is at play, firms that hold private meetings should have les investor uncertainty around the subsequently forecasted earnings announcement than similar firms that also issue stand-alone guidance but do not have such meetings.

Consistent with our expectations, we find that firms with private meetings (“meeting firms”) experience an incremental 1.2 percentage point reduction in investor uncertainty around their earnings announcement than firms that issue stand-alone guidance but do not have such meetings (“non-meeting firms”). This reduction is economically meaningful – the average sample firm experiences a reduction in investor uncertainty of 12.4 percentage points when announcing earnings, indicating that meeting firms have a 10 percent larger reduction in investor uncertainty than non-meeting firms do. We strengthen this evidence by documenting that meeting and non-meeting firms have statistically indistinguishable changes in investor uncertainty around the issuance of stand-alone management guidance and during the days before earnings announcements. These results suggest that the soft information investors gain from private meetings does not help them better understand the stand-alone management guidance itself relative to similar firms that also issue guidance but do not have such meetings. Thus, private meetings with firm management appear to include soft information that helps investors better interpret subsequently forecasted earnings announcements.

We further investigate our claim regarding the importance of the soft information investors gather from private meetings. Prior work argues that firms providing longer-horizon guidance and R&D intensive firms possess more soft information than other firms. An information mosaic in our context comprises the soft information from private meetings and the voluminous information from subsequently forecasted earnings announcements. Therefore, we expect a greater reduction in investor uncertainty when a firm possesses more soft information. Consistent with this expectation, we find that firms with more soft information – in our context, firms that provide longer-horizon management guidance or firms that have greater R&D intensity – and hold private meetings show a greater reduction in investor uncertainty around the subsequent earnings announcement than other firms that also hold such meetings.

One concern with these analyses is the potential endogenous nature of private meetings. To help mitigate such concerns, we note that 87 percent of our sample of investor meetings occur at investor conferences. After a series of analyses establishing that the first few broker-sponsored conferences are relatively exogenous events for participating firms in our sample, we show that firms with private meetings experience an incremental 5.1 percentage point decrease in investor uncertainty at earnings announcements relative to firms that issue stand-alone guidance but do not have such meetings. Overall, the evidence suggests that private meetings provide investors with soft information that helps them leverage an information mosaic to interpret the information in earnings announcements.

Finally, we examine two alternative explanations for our results. One is: the potential impact of meetings on information asymmetry among investors. The second is the potential impact of differences in market reactions to information releases by firms that issue management guidance in conjunction with private meetings and firms that also issue guidance but do not have such meetings. Using multiple measures of information asymmetry, we fail to find statistically distinguishable differences in information asymmetry around stand-alone management guidance events, from the time after the stand-alone guidance to the subsequently forecasted earnings announcement, or around the subsequently forecasted earnings announcement for firms with private meetings relative to similar firms without such meetings. This evidence helps rule out information asymmetry as an alternative explanation. Regarding the second concern, we fail to find evidence of a different market reaction between firms with face-to-face meetings and non-meeting firms around stand-alone management guidance events, from the time after the stand-alone guidance to the subsequently forecasted earnings announcement and around the subsequently forecasted earnings announcement. Overall, the results do not support these alternative explanations.

Our findings contribute to prior work by studying the interplay between disclosure events that occur at different times, an area of research that has received relatively little attention. We also view the notion of an information mosaic as highlighting how soft information collected during private meetings may help investors better interpret subsequent accounting disclosures, going beyond studies that investigate whether investors react to soft information when they expect subsequent accounting disclosures to verify its truthfulness. Finally, our evidence regarding the potential for investors to leverage soft information from private meetings to interpret the information that firms release at subsequent earnings announcements sheds light on how investors assemble soft and hard information to generate an information mosaic, a well-known concept that has lacked empirical evidence. We believe our results shed light on a fundamental capital markets question: How do investors assemble bits of information into a material mosaic?

This post comes to us from professors Xinlei Li at Hong Kong University of Science and Technology, Jason D. Schloetzer and Ayung Tseng at Georgetown University’s McDonough School of Business, and Hui Wang at Hong Kong University of Science and Technology. It is based on their recent article, “Leveraging An Information Mosaic: The Interplay between Private Meetings with Investors and Subsequent Earnings Announcements,” available here.