Investor Overlap and Diffusion of Disclosure Practices

This paper examines how one firm’s commitment to provide more public disclosure affects other firms’ disclosure practices in subsequent periods. I develop an investor demand-driven explanation for why and when firms adopt the disclosure innovation of a first-mover firm. I test the hypothesis that overlap in institutional ownership between two firms is a mechanism by which one firm’s greater disclosure creates demand pressure for the other firm to follow. Using market risk disclosures as my empirical setting, I find that a firm’s decision to follow a first-mover in providing more quantitative information in its 10-K filing than is required by the SEC is positively associated with the level of, and changes in, institutional investor overlap. I also find that the association is stronger for overlap among investors with greater influence over managers’ disclosure decisions, investors with incentives to demand public disclosure, and for firms whose investors are most likely to demand expanded disclosure. Overall, this evidence provides new insight into patterns of intra-industry disclosure behavior and highlights investor overlap as a source of variation in firms’ information environments that can be used in future research.