Darren T. Roulstone

The Determinants and Consequences of Information Acquisition via EDGAR

Using a novel dataset that tracks all web traffic on the SEC’s EDGAR servers from 2008-2011, we examine the determinants and capital market consequences of investor information acquisition of SEC filings. The average user employs the database very few times per quarter and most users target specific filing types such as periodic accounting reports; a small subset of users employ EDGAR almost daily and access many filings. EDGAR activity is positively related with corporate events (particularly restatements, earnings announcements, and acquisition announcements), poor stock performance, and the strength of a firm’s information environment. EDGAR activity is related to, but distinct from, other proxies of investor interest such as trading volume, business press articles, and Google searches. Finally, information acquisition via EDGAR, both to obtain earnings news and to provide context for it, has a positive influence on market efficiency with respect to earnings news. Overall, our results provide a unique, user-based perspective on investor access of mandatory disclosures and its impact on price formation.

Acquirer Valuation and Acquisition Decisions: Identifying Mispricing Using Short Interest

We use short interest as an investor-based measure of over- or undervaluation that distinguishes between the misvaluation and Q-theories of mergers. Using this measure, we find that misvaluation is a strong determinant of merger decision-making. Firms in the top quintile of short interest are 54% more likely to engage in stock acquisitions and 22% less likely to engage in cash acquisitions. Stock (but not cash) acquirers have higher short interest than their targets. Overall, our results suggest that the previously documented underperformance of stock acquirers and the overperformance of cash acquirers can be explained by misvaluation, as captured by short interest.

Why Do Small Stock Acquirers Underperform in the Long-Term?

We study the long-term performance of acquirers with respect to their size and method of payment. Our results shed new light on why stock acquirers appear to underperform cash acquirers in some studies. We present two main results. First, there is no economically or statistically significant difference between the performance of large stock acquirers and large cash acquirers. Conversely, small stock acquirers underperform small cash acquirers by about 12 in the first 12 months following mergers and up to 18 in the first 36 months. Hence, the previously documented underperformance of stock acquirers is due to the underperformance of small stock acquirers exclusively. Second, we find evidence that this underperformance is likely caused by mispricing related to limits to arbitrage: measures of short-selling constraints, illiquidity, and information uncertainty proxies subsume the size effect in our tests. We find no evidence that underperformance is related to acquirer-target integration problems or to earnings management prior to mergers.

The Comovement of Investor Attention

Prior literature has documented that investor attention and constraints on that attention are associated with the pricing of stocks. We introduce the concept of attention comovement, which is the extent to which investor attention for a firm is explained by attention paid to the firm’s industry and the market in general. We find that attention comovement is non-trivial for the average firm and is related to firm characteristics, such as size and visibility. We also find that the comovement of investor attention has market consequences, in that it is positively associated with excess stock return comovement. Finally, we show that a firm’s earnings announcement contributes to the transfer of attention from one firm to its peer firms. Our results provide insights about the information flows underlying return comovement and aid in understanding the micro- and macro-nature of investor attention.

The People in Your Neighborhood: Evidence of Local Information Leakage Around Corporate Headquarters When Insiders Trade

This study adds to the literature on the existence of information asymmetries in financial markets by investigating whether information leakage occurs in the local geographic area surrounding corporate headquarters at the time of nonpublic corporate events. On days when a corporation’s headquarters city is the top location for Google searches for company-specific financial information, we find that insider selling is positively associated with the volume of Google search. This result is consistent with information leakage in close proximity to corporate headquarters before news of insider selling is public. In addition, we find that insider selling is negatively associated with Google search volume when the top search location is away from corporate headquarters, consistent with insiders avoiding selling shares around public information events. We also find more negative future abnormal returns when local information search is high at the time of insider selling. Collectively, our results provide evidence consistent with a local information advantage near corporate headquarters when insiders sell their shares.