Does Stricter Disclosure Regulation of Private Meetings Improve the Information Environment?
Private meetings between management and investors occur worldwide and are generally held at corporate headquarters with invited investors and sell-side analysts (also known as site visits). Ng and Troianovski (WSJ, 2015) report that US investors spend $1.4 billion a year for 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. The Shenzhen Stock Exchange (SZSE) in China is the only regulatory jurisdiction that requires disclosure of the existence, participants, and content of these private meetings in annual reports since 2009. The SZSE tightened these regulations in July 2012 to require disclosure within two business days of a private site visit. Thus, the SZSE provides a unique setting to examine the consequences of enforcing stricter disclosure regulation of private meetings.
The first research question of our recent paper examines whether the new post-July 2012 disclosure regime improved the quality of the information environment. We use stock price volatility and information efficiency as our market-based measures of the quality of the information environment (Francis et al, 2006). Our results are consistent with degradation (rather than improvement) of the information environment for SZSE firms. Stock price volatility increased while information efficiency declined around private meeting dates and subsequent earnings announcement dates in the post-July 2012 period for SZSE firms relative to Shanghai Stock Exchange firms.
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 (ie 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. However, 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 in the information environment is likely driven by the changing composition of mutual funds attending private meetings, especially the 90% of participating mutual funds with little or no ownership in the meeting firms.
Our study makes several contributions. First, existing studies of private meetings (eg 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 the overall information environment and subsequent impact on firm and investor behavior after increased disclosure was mandated in July 2012. Second, we can draw 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 (eg Francis et al, 2006) have examined the effect of changes in disclosure regulation on the information environment, 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 information efficiency.
Private meetings are pervasive worldwide. Although Chinese stock markets have different institutional details compared to the western economies, our research provides direct evidence on this important global phenomenon 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 relevant disclosure policy.
Songlian Tang is an Associate Professor of Accounting at the East China University of Science and Technology.
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