Using a novel pairwise measure of firms' acquisition of rivals' disclosures, we show that investment opportunities drive interfirm information flows. We find that these flows predict subsequent mergers and acquisitions as well as how and how much firms invest, relative to rivals. Moreover, firms' use of rivals' information often hinges on the similarities of their products. Our results suggest that rivals' public information, far from being unusable, helps facilitate investment and product decisions, including acquisitions and product differentiation strategies. The findings also support a learning mechanism that could partly underlie the emerging literature on peer investment effects.

No abstract

No abstract

One of the hallmarks of the Security and Exchange Commision's (SEC's) investigative process is that it is shrouded in secrecy––only the SEC staff, high-level managers of the company being investigated, and outside counsel are typically aware of active investigations. We obtain novel data on all investigations closed by the SEC between 2000 and 2017––data that were heretofore nonpublic––and find that such investigations predict economically material declines in future firm performance. Despite evidence that the vast majority of these investigations are economically material, firms are not required to disclose them, and only 19% of investigations are initially disclosed. We examine whether corporate insiders exploit the undisclosed nature of these investigations for personal gain. Despite the undisclosed and economically material nature of these investigations, we find that insiders are not abstaining from trading. In particular, we find a pronounced spike in insider selling among undisclosed investigations with the most severe negative outcomes; and that abnormal selling activity appears highly opportunistic and earns significant abnormal returns. Our results suggest that SEC investigations are often undisclosed, economically material nonpublic events, and that insiders are trading in conjunction with these events. This paper was accepted by Suraj Srinivasan, accounting.

We examine cross-sectional variation in disclosure speed by using data that allow us to measure when managers learn of SEC investigations and the time lag until subsequent disclosures. We document that external monitoring and litigation risk are associated with 99% and 39% faster disclosure, and managerial entrenchment with 28% slower disclosure. When revelations by external parties preempt managers’ disclosures, we observe a significant increase in bid-ask spreads that persists for at least three years following the close of the investigation and a higher likelihood of turnover for less entrenched CEOs. We also document that firms whose managers disclose investigations are subject to fewer subsequent securities class action lawsuits. Our results are consistent with managers balancing the costs of fast disclosure, including immediate stock price declines and potential reputational costs, with the risks of having external parties leak news of SEC investigations.