Standing in the Limelight: EDGAR Attention and Managerial Bad News Hoarding

This paper examines the effect of active attention from sophisticated market participants on managerial bad news hoarding. Using EDGAR search volume (ESV) as a direct measure, we find that, due to the increased cost of bad news disclosure, firms under greater active attention from sophisticated market participants tend to hide bad news and release it subsequently, thus increasing future stock price crash risk. The impact of EDGAR attention is stronger for firms with higher ex-ante cost of bad news disclosure. Evidence from option prices, management guidance, and accounting practices further confirms managers’ tendency to hide bad news under greater active attention. Three plausible natural experiments based on the implementation of EDGAR, shareholder distraction by other industries, and the mandatory adoption of XBRL provide a causal inference. By providing systematic evidence on the impact of attention from sophisticated market participants on managerial bad news hoarding, this paper sheds light on the pressure effect of external attention on managers’ strategic bad news disclosure.