Large Shareholders with Diversified Equity Portfolios and Voluntary Disclosure: International Evidence

Abstract

This study, using a recently available dataset that tracks investors’ equity holdings across countries, investigates the relation between the degree of large shareholders’ acquisition of equity in multiple firms (i.e., portfolio diversification) and corporate voluntary disclosures. While large shareholders are traditionally viewed as investors with sufficient resources to acquire costly private information, we posit that shareholders with more diversified portfolios have greater reliance on public disclosures owing to resource constraints. Hence, we expect these shareholders to have a stronger demand for voluntary disclosures as a less costly alternative information source. Consistent with this prediction, we find that large shareholder portfolio diversification relates positively to voluntary disclosures as measured by the incidence and the frequency of management forecasts, conference calls, analyst/investor days, and product-related announcements. Corroborating our main analysis, we document a negative impact of portfolio diversification on voluntary disclosures when the firms providing the disclosures constitute a significant portion of large shareholders’ investment portfolios. We also find that the positive relation between large shareholder portfolio diversification and voluntary disclosure is more pronounced when the firm is located in a country with a lower quality labor market. In addition, we find that firms cater to diversified large shareholders’ public information reliance by providing disclosures that elicit a stronger stock market reaction, indicating the high information content of these disclosures. Overall, our findings suggest that diversified portfolio holdings incentivize large shareholders to place greater reliance on public information and that managers respond through providing high-quality voluntary disclosures.