The Effect of Investor Inattention on Voluntary Disclosure

We examine whether investor inattention influences managers' non-GAAP earnings disclosures. Hirshleifer and Teoh's (2003) theoretical model predicts that managers are more likely to disclose aggressive non-GAAP metrics when investors are inattentive. Employing a measure that captures exogenous variation in investor inattention, we find that managers provide more aggressive non-GAAP disclosures when inattention is high. Consistent with managers exploiting investors' limited attention, we find that the stock price response to non-GAAP exclusions is stronger when investors are inattentive and that managers are more likely to respond to inattention with aggressive non-GAAP disclosures if they sell shares following the disclosure.