Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring

Almazán, Andrés; Banerji, Sanjay; Motta, Adolfo de

doi:10.2139/ssrn.687485

Cited by 22 publications

(34 citation statements)

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“…The first explains board structure as the result of optimal shareholder choices under incomplete contracts (Hermalin and Weisbach (1998), Raheja (2005), Song and Thakor (2006), Adams and Ferreira (2007), and Harris and Raviv (2007)). The second examines the role of stock prices in disciplining managers and providing incentives to insiders (Holmstrom and Tirole 4 (1993), Faure-Grimaud and Gromb (2004), and Almazan, Banerji, and Motta (2007)). To the best of our knowledge, these two strands of the literature have never before been put together.…”

Section: Introductionmentioning

confidence: 99%

Board structure and price informativeness☆

Ferreira

Raposo

2011

Journal of Financial Economics

301

175

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We develop and test the hypothesis that private information incorporated into stock prices affects the structure of corporate boards. Stock price informativeness may be a complement to board monitoring, because the information revealed by prices can be used by directors to monitor management. But price informativeness may also be a substitute for board monitoring, because more informative prices can trigger external monitoring mechanisms, such as takeovers. We find robust evidence for the substitution effect: Stock price informativeness, as measured by the probability of informed trading (PIN), is negatively related to board independence. Consistent with the model's predictions, this relationship is particularly strong for firms exposed to external governance mechanisms and internal governance mechanisms, and firms for which firm-specific knowledge is relatively unimportant. We address endogeneity concerns in a number of different ways and conclude that our results are unlikely to be driven by omitted variables or reverse causality. The results are also robust to using different measures of price informativeness and different proxies for board monitoring JEL classification: G32, G34 Keywords: Corporate boards, Independent directors, Price informativeness * We thank Carola Frydman, Jeffrey Gordon, Itay Goldstein, Antoine Faure-Grimaud, Pedro Santa-Clara, Antoinette Schoar, and Laura Starks; seminar participants at the City University of London, EBRD, LSE, Tilburg University, and University of Texas-Austin; and participants at the Lisbon-Sloan MIT corporate finance and governance workshop for helpful comments and suggestions.

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Section: Introductionmentioning

confidence: 99%

Board structure and price informativeness☆

Ferreira

Raposo

2011

Journal of Financial Economics

301

175

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“…We test empirically the mechanisms that motivate and allow managers to credibly transmit soft information to the market (Almazán et al, 2008). We first present evidence confirming that managers whose compensation is more sensitive to stock market prices engage more in cheap talk measures, including stock split announcements, voluntary earnings forecasts, and press releases.…”

Section: Introductionmentioning

confidence: 95%

“…This idea is developed further in the theoretical model of Bhattacharya and Jacobsen (2016) explaining the signaling power of stock repurchases announcements, which fall within the category of apparently costless signals. Almazán et al (2008) discuss cheap talk in the context of an agency problem between managers and shareholders. They present a model where managers who have positive information about their firms can use cheap talk in order to attract the attention of analysts and speculators.…”

Section: Related Literaturementioning

confidence: 99%

“…First, they can use signals with direct and explicit costs for the firm, like leverage or dividends, which make these signals credible. Second, they can use cheap talk as explained by Bhattacharya and Dittmar (2008) and Almazán, Banerji, and Motta (2008).…”

Section: Introductionmentioning

confidence: 99%

“…Theories related to cheap talk are well established in the economics literature (see, e.g., Chakraborty & Harbaugh, 2010;Crawford, 1998;Farrell & Rabin, 1996;Stein, 1989), whereas the application in finance is rather limited, with Almazán et al (2008) being one of the few examples. This paper is the first to test empirically and comprehensively the cheap talk theory in the context of finance as an effective transmission of information mechanism and taking into consideration CEOs' incentives and reputational costs.…”

Section: Introductionmentioning

confidence: 99%

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Managerial incentives for attracting attention

Gutiérrez

Papiashvili²,

Tribó

et al. 2019

Euro Fin Management

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This paper studies the mechanisms which motivate managers to engage in cheap talk and attract the market's attention in a credible way. We consider stock split announcements, voluntary earnings forecasts, and press releases issued by firms to the media as proxies for managerial cheap talk. We show that: (a) managerial performance‐related pay contracts incentivize executives to attract attention; (b) analysts increase their coverage of firms following cheap talk; and (c) chief executive officers are punished for attracting attention when market prices do not increase following cheap talk. The results are stronger for firms which are most in need of attention.

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Cheap talk? Strategy presentations as a form of chief executive officer impression management

2016

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Research summary:We develop and test a set of hypotheses on investors' reactions to a specific form of impression management, public presentations of overall strategy by Chief Executive Officers (CEOs). Contrary to expectations from a "cheap talk" perspective, we suggest that such strategy presentations convey valuable information to investors, especially in conditions of heightened information asymmetry associated with varying types of new CEOs. Broad empirical support for our theoretical arguments is shown in a sample of strategy presentations carried out by NYSE and NASDAQ listed organizations over 10 years. Our research contributes to literature on new CEOs and impression management. We draw out implications both for management and for further research. Managerial summary:We examine the impact of public presentations on company strategy by Chief Executive Officers (CEOs) on company stock prices. Adjusting for market movements in general, on average stock prices rose by 1.6 percent following these strategy presentations. Strategy presentations received larger reactions the more the CEO was unfamiliar to investors. Thus, stock price gains for new CEOs in general were 5.3 percent; for external, within-industry new CEOs, they were 9.3 percent; and for external, outside-of-industry new CEOs, they were 12.4 percent. Given that only 40 percent of new CEOs present on strategy in their first 200 days post-appointment, we suggest that new CEOs pay more attention to this potential means of communicating, especially if they are unfamiliar to investors.

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Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring

Cited by 22 publications

References 50 publications

Board structure and price informativeness☆

Board structure and price informativeness☆

Managerial incentives for attracting attention

Cheap talk? Strategy presentations as a form of chief executive officer impression management

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