The Effect of 2004 8-K Expansion on Information Asymmetry Among Investors

Abstract

Disclosure complexity may increase the information asymmetry between sophisticated and retail investors, due to unsophisticated investors’ more limited capacity to process complex disclosures. I explore whether a 2004 Securities and Exchange Commission (SEC) rule that changed the timing of material contract disclosures helps mitigate this problem, by allowing investors more time to process periodic filings. Using data from quarterly financial statements and material contracts filed between 2001 and 2007, I find that the 2004 requirement significantly lowers the information asymmetry among investors immediately following quarterly financial statement disclosures. Moreover, the effect is more pronounced for firms that file more complex contracts, attract more retail investors, and experience greater change in the timeliness of their material contract filings. The effect is also larger for firms whose financial statements are disclosed during periods when investors are more time constrained. This evidence should be of interest to the SEC and other regulators who strive to level the information playing field among investors and to maintain fair and efficient markets.