Alon Kalay

Investor Sophistication and Disclosure Clienteles

Abstract:
Using variation in inefficient call option exercise activity as a proxy for variation in the sophistication of the firm's investors, this paper presents empirical evidence consistent with a disclosure clientele effect. Disclosure clientele is defined as the ability of different types of disclosure activities to attract investors with varying levels of sophistication. Disclosure clienteles exists because investor sophistication (information processing abilities) affects investors' preferences for disclosure activities that vary in the type of information released and the way it is communicated. Specifically, sophisticated information processors concentrate their trading activity in firms that issue earnings guidance on a regular basis. This relation is stronger prior to RegFD, when sophisticated investors' preferences for forecasting firms are expected to be greater. Alternatively, less sophisticated investors are more prevalent in firms with increased levels of press dissemination and superior investor relations activities (e.g., better access to information on the corporate website). These results suggest an investor's demand for disclosure is partially driven by her ability to utilize disclosed information.

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