BLOCKHOLDER HETEROGENEITY AND CORPORATE TEXTUAL DISCLOSURE QUALITY

Abstract

This study investigates whether and how different types of blockholders affect a firm’s textual disclosure quality. Using a hand-collected blockholder-firm panel sample from 2011 to 2016, I find that, on average, both the aggregate blockholder ownership and the total number of blockholders are negatively associated with the readability of firms’ 10-K reports, after controlling for the numerical quality of earnings. When blockholders are categorized into different groups based on their filing choices and their affiliations with management, I find that firms with greater number of unaffiliated 13D filers write more readable 10-K reports while firms with both greater number and greater ownership of affiliated 13D filers write less readable 10-K reports than firms with only passive blockholders (13G filers). I further categorize unaffiliated 13D filers into three groups with different levels of activism: management-focused blockholders, policy-focused blockholders, and information-focused blockholders. Unaffiliated 13D filers, who are perceived to be hostile to management (management-focused blockholders), elicit less readable 10-K reports. In contrast, unaffiliated 13D filers who are not perceived as threatening the incumbent management (information-focused blockholders) elicit more readable 10-K reports. These findings are consistent with managers responding in a strategic manner to perceived blockholder intentions.