Investment Opportunities, Market Feedback, and Voluntary Disclosure: Evidence from the Shale Oil Revolution

Abstract

Recent theories posit that investment opportunities encourage managers to provide voluntary disclosures to elicit informational feedback from stock prices to improve investment decisions, even as doing so encourages informed trading and worsens adverse selection among investors. We test this prediction in a difference-in-differences framework using the shale oil revolution in the early 2010s as an exogenous shock to investment opportunities for oil and gas (“O&G”) firms. During this period, we find that O&G firms increased capex forecasts and decreased earnings forecasts relative to similar, capital-intensive firms outside of the O&G industry and that these effects are concentrated among O&G firms with more informed trading and relatively poorer managerial information. We also find that O&G firms that adjusted their earnings and capex forecasts display both an increase in investment-q sensitivity and a decrease in stock liquidity during the shale oil revolution. Taken together, these results suggest that managers adjust their portfolio of voluntary disclosures to facilitate managerial learning from stock prices in response to investment opportunities, despite worsening adverse selection costs in the process.