Limited Attention, Information Disclosure, and Financial Reporting

David Hirshleifer and Siew Hong Teoh

Journal of Accounting and Economics, December 2003


This paper models firms’ choices between alternative means of presenting information, and
the effects of different presentations on market prices when investors have limited attention and processing power. In a market equilibrium with partially attentive investors, we examine the effects of alternative: levels of discretion in pro forma earnings disclosure, methods of accounting for employee option compensation, and degrees of aggregation in reporting. We derive empirical implications relating pro forma adjustments, option compensation, the growth, persistence, and informativeness of earnings, short-run managerial incentives, and other firm characteristics to stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions.

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