Investor sophistication and disclosure clienteles

This paper explores the idea of disclosure clienteles. Disclosure clienteles refer to the ability of different types of disclosure activities to differentially benefit investors with varying levels of sophistication. Disclosure clienteles exist because variation in investor sophistication affects investors' ability to utilize disclosed information and thus their preferences for distinct disclosure activities. I use cross-sectional variation in inefficient exercise activity in the options market to identify variation in sophistication (e.g., investors' attention, knowledge, and expertise) and then present empirical evidence consistent with disclosure clienteles. The results show that sophisticated investors concentrate their trading in firms that regularly issue earnings guidance. This relation is stronger before RegFD, when sophisticated investors' preferences for forecasting firms are predicted to be greater. Alternatively, less sophisticated investors are more prevalent in firms with increased levels of press-dissemination and superior investor relations (e.g., better access to information on the corporate website). These results suggest investors' demand for disclosure is partially driven by their ability to use disclosed information.