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Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring

Authors

  • ANDRES ALMAZAN,

  • SANJAY BANERJI,

  • ADOLFO DE MOTTA

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    • Andres Almazan is with the University of Texas at Austin. Sanjay Banerji is with the University of Essex; and Adolfo de Motta is with McGill University. We would like to thank Aydogan Alti, Susan Christoffersen, Francesca Cornelli, Steven Gallaher, Ron Giammarino, Jay Hartzell, Paul Newman, Oguzhan Ozbas, Ramesh Rao, Ronnie Shah, Robert Stambaugh, Sheridan Titman, Omar Toulan, Alexandra West, an anonymous referee, and seminar participants at the American Finance Association 2006 Winter Meetings, Concordia University, Gerzeensee, University of Leeds, McGill University, University of Southern California, University of Texas at Austin, University of Warwick, and the Accounting and Finance Conference at UT-Austin. Andres Almazan thanks MIT for its hospitality and Adolfo de Motta thanks SSHRC for its financial support.


ABSTRACT

We provide a theory of informal communication—cheap talk—between firms and capital markets that incorporates the role of agency conflicts between managers and shareholders. The analysis suggests that a policy of discretionary disclosure that encourages managers to attract the market's attention when the firm is substantially undervalued can create shareholder value. The theory also relates the credibility of managerial announcements to the use of stock-based compensation, the presence of informed trading, and the liquidity of the stock. Our results are consistent with the existence of positive announcement effects produced by apparently innocuous corporate events (e.g., stock dividends, name changes).

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