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Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring

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  • ANDRES ALMAZAN
  • SANJAY BANERJI
  • ADOLFO DE MOTTA

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).

Suggested Citation

  • Andres Almazan & Sanjay Banerji & Adolfo De Motta, 2008. "Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring," Journal of Finance, American Finance Association, vol. 63(3), pages 1399-1436, June.
  • Handle: RePEc:bla:jfinan:v:63:y:2008:i:3:p:1399-1436
    DOI: 10.1111/j.1540-6261.2008.01361.x
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    Cited by:

    1. Pabst, Stefan & Mohnen, Alwine, 2021. "On founders and dictators: Does it pay to pay for signals in crowdfunding?," Journal of Business Venturing Insights, Elsevier, vol. 15(C).
    2. Xi He & Mingsheng Li & Jing Shi & Garry Twite, 2016. "Why do firms pay stock dividends: Is it just a stock split?," Australian Journal of Management, Australian School of Business, vol. 41(3), pages 508-537, August.
    3. Pierre Chaigneau & Nicolas Sahuguet, 2023. "The Complementarity Between Signal Informativeness and Monitoring," Journal of Accounting Research, Wiley Blackwell, vol. 61(1), pages 141-185, March.
    4. Josef Schroth, 2020. "Outside Investor Access to Top Management: Market Monitoring versus Stock Price Manipulation," Staff Working Papers 20-43, Bank of Canada.
    5. Sheridan Titman & Chishen Wei. Wei & Bin Zhao, 2021. "Corporate Actions and the Manipulation of Retail Investors in China: An Analysis of Stock Splits," NBER Working Papers 29212, National Bureau of Economic Research, Inc.
    6. Edmans, Alex & Huang, Chong & Heinle, Mirko, 2013. "The Real Costs of Disclosure," CEPR Discussion Papers 9637, C.E.P.R. Discussion Papers.
    7. Park, Na Young, 2016. "Domain-specific risk preference and cognitive ability," Economics Letters, Elsevier, vol. 141(C), pages 1-4.
    8. Titman, Sheridan & Wei, Chishen & Zhao, Bin, 2022. "Corporate actions and the manipulation of retail investors in China: An analysis of stock splits," Journal of Financial Economics, Elsevier, vol. 145(3), pages 762-787.
    9. Vollmer, Hendrik, 2016. "Financial numbers as signs and signals: Looking back and moving forward," economic sociology. perspectives and conversations, Max Planck Institute for the Study of Societies, vol. 17(2), pages 32-38.
    10. Richard Whittington & Basak Yakis-Douglas & Kwangwon Ahn, 2016. "Cheap talk? Strategy presentations as a form of chief executive officer impression management," Strategic Management Journal, Wiley Blackwell, vol. 37(12), pages 2413-2424, December.
    11. Ferreira, Daniel & Ferreira, Miguel A. & Raposo, Clara C., 2011. "Board structure and price informativeness," Journal of Financial Economics, Elsevier, vol. 99(3), pages 523-545, March.
    12. Daniel Ferreira & Gustavo Manso & André C. Silva, 2014. "Incentives to Innovate and the Decision to Go Public or Private," Review of Financial Studies, Society for Financial Studies, vol. 27(1), pages 256-300, January.
    13. Ulrike Malmendier, 2018. "Behavioral Corporate Finance," NBER Working Papers 25162, National Bureau of Economic Research, Inc.
    14. Najah Attig & Wenyao Hu & Mohammad M. Rahaman & Ashraf Al Zaman, 2023. "Overselling corporate social responsibility," Financial Management, Financial Management Association International, vol. 52(3), pages 573-610, September.
    15. Mamatzakis, Emmanuel & Zhang, Xiaoxiang & Wang, Chaoke, 2016. "Invisible hand discipline from informed trading: Does market discipline from trading affect bank capital structure?," MPRA Paper 76215, University Library of Munich, Germany.
    16. Todd W. Moss & Donald O. Neubaum & Moriah Meyskens, 2015. "The Effect of Virtuous and Entrepreneurial Orientations on Microfinance Lending and Repayment: A Signaling Theory Perspective," Entrepreneurship Theory and Practice, , vol. 39(1), pages 27-52, January.
    17. Park, Na Young, 2020. "Trust and trusting behavior in financial institutions: Evidence from South Korea," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 408-419.
    18. Erfan Rezvani & Christian Rojas, 2022. "Firm responsiveness to consumers' reviews: The effect on online reputation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(4), pages 898-922, November.
    19. Nemanja Antić & Nicola Persico, 2020. "Cheap Talk With Endogenous Conflict of Interest," Econometrica, Econometric Society, vol. 88(6), pages 2663-2695, November.
    20. Wellalage, Nirosha Hewa & Locke, Stuart, 2020. "Formal credit and innovation: Is there a uniform relationship across types of innovation?," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 1-15.
    21. Karapandza, Rasa, 2016. "Stock returns and future tense language in 10-K reports," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 50-61.
    22. María Gutiérrez & Nino Papiashvili & Josep A. Tribó & Antonio B. Vazquez, 2020. "Managerial incentives for attracting attention," European Financial Management, European Financial Management Association, vol. 26(4), pages 896-937, September.
    23. Lin, Ji-Chai & Stephens, Clifford P. & Wu, YiLin, 2014. "Limited attention, share repurchases, and takeover risk," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 283-301.

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