How Firms’ Simultaneous Release of Information Affects Market Feedback
Can managers obtain more useful feedback from capital markets by disclosing pieces of information separately and at different times instead of bundling the information and releasing it at once?
Tim Martens, Bocconi University
It is well known that capital markets’ response to firms’ announcements may reveal useful information for corporate managers, especially if the success of an investment opportunity depends on external factors, such as the position of competitors or expectations about consumer demand. In a recent study, we document that the extent to which managers can extract valuable signals from stock prices may depend on how much information is released simultaneously.
Consider a firm that seeks to announce a new strategic initiative, such as a planned acquisition or the development of a new technology. The company may decide to announce this initiative together with other information during, for example, an upcoming earnings announcement. If these different pieces of information complement each other, releasing them at once could help the market set the firm’s stock price and, hence, provide more valuable feedback for managers. Similarly, releasing multiple pieces of information at a prescheduled event could draw investors’ attention to the information and thus result in a more accurate stock price. On the other hand, announcing a strategic initiative jointly with other corporate news may also reduce managers’ ability to extract a clear message from the market. In particular, when information is released simultaneously stock prices will reflect the market’s aggregate assessment of the combined disclosure. As a result, managers may find it more difficult to infer whether the response is attributable solely to the most recent earnings news, the simultaneously announced strategic initiative, or both. Disclosing information all at once may thus make it difficult to tie the market’s response to specific pieces of information and, hence, to use specific feedback from the market for follow-up decisions.
Should firms that seek capital market feedback stagger the release of information or bundle it for concurrent release? Our results suggest that firms may be able to obtain more useful feedback for follow-up decisions from capital markets when they release information separately.
We focus on corporate investments in innovation and take advantage of the United States Patent and Trademark Office’s (USPTO’s) disclosure mechanism of firm-specific patent information. Patent grants represent the release of information about the value of a firm’s investments that will likely trigger market responses. At the same time, the exact timing of patent grants, and hence the number of patents that a given firm receives on a given day, is independent of firms’ own preferences about when and how information should be released. This allows us to examine how bundled vs. separate information releases affect managers’ ability to learn from market prices.
We find that the market’s assessment of patents is more predictive of related follow-up investments if the firm receives fewer patents on the same day. Managers thus seem more capable of extracting useful information about past investment in innovation from the market’s response around patent grant dates if the market reaction can be more clearly attributed to a particular past investment in innovation in the form of a patent grant. We also find that a firm’s ability to extract clearer signals from the market’s response seems more relevant for relatively riskier and exploratory innovations for which feedback is more important. Capital market feedback thus seems to be a useful source of information that managers incorporate into their decision-making regarding risky investments, such as innovation.
Firms’ ability to learn from market signals not only seems to affect subsequent investments, but also the overall economic value and contribution of those investments. In particular, we document that firms’ future patent portfolios are more valuable and receive more follow-up investments when firms were exposed to more separate information releases in the past, i.e., if they were able to extract more feedback from the market. However, the benefits of more specific market feedback may also come at a cost: Market signals are public and receiving a clearer signal thus also extends to a firm’ competitors and rivals. In fact, we find that competitors are more likely to invest in similar technologies if they can extract more specific market feedback about the value of peer firms’ investments, consistent with the notion of competitor learning.
Taken together, our findings reveal another potential mechanism for how corporate disclosure may affect investment. While the effect of market prices on decisions has been well documented, there is still considerable debate about whether and how corporate disclosures facilitate or impede managers’ ability to gather decision-relevant information from capital markets. Our findings indicate that managers may find it easier to infer feedback from the market’s response to information releases if the response can be tracked back to specific pieces of information and if there are fewer contemporaneous events clouding feedback in market prices. At the same time, more precise market feedback may also convey valuable and timely information to competitors. The trade-off between bundling and unbundling specific pieces of information may thus be more nuanced than previously thought.
This blog is based on the recent paper Mustafa Ahci at Tilburg University School of Economics and Management, Tim Martens at Bocconi University, and Christoph J. Sextroh at Tilburg University School of Economics and Management, “Simultaneous Information Releases and Capital Market Feedback,” available here.
This blog was originally published on the CLS Blue Sky Blog