Mandated disclosure, institutional investors and stock price informativeness: Evidence from a quasi-natural experiment

Abstract

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We investigate the link between mandated disclosure and investor preferences using a regulatory change that required the disclosure of patent applications 18 months after filing. This change allows us to separate the disciplinary effect provided by disclosure from the information effect. Leveraging cross-sectional variation in exposure to the change, we find an increase in institutional ownership in the period prior to the information release, a reduction in blockholders' stakes, and an increase in trading by informed investors. Importantly, stock prices also become more informative. Our evidence implies that governance implications should be a central consideration for disclosure and reporting regulation.