Do Improvements in the Information Environment Enhance Insiders’ Ability to Learn from Outsiders?
Accepted by Philip Berger. Part of this work was developed while Gilberto Loureiro was visiting Nova School of Business and Economics. We thank an anonymous referee, participants at the 2012 FMA Annual Meeting, the 2013 FMA European Conference meeting, Lubrafin 2014 meeting, PFN 2014 meeting, and seminar participants at the University of Tennessee, Católica Lisbon, and Porto Business School for valuable comments and suggestions. Gilberto Loureiro thanks Fundação para a Ciência e a Tecnologia (FCT), COMPETE, and QREN for financial support. This paper was previously circulated under the title “Do Improvements in the Information Environment Affect Real Investment Decisions?”
ABSTRACT
We examine whether and how an exogenous shock to the information environment changes insiders’ ability to learn from outsiders. We document three main findings. First, we find an increase in investment‐to‐price sensitivity following the adoption of International Financial Reporting Standards (IFRS). Second, we show that the relation between the market reaction to M&A deal announcements and the likelihood of deal completion becomes stronger after IFRS adoption. Third, we find significant improvements in post‐acquisition operating and stock return performance post‐IFRS adoption. These results are more pronounced for firms that experienced significant increases in foreign institutional ownership around IFRS adoption, especially when these foreign investors are from countries that matter for the firm’s growth opportunities. Taken together, our findings suggest that insiders’ ability to learn from outsiders improves post‐IFRS, and this improved ability to learn from outsiders leads to real economic gains.
Citing Literature
Number of times cited according to CrossRef: 16
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