What If There Were No Annual Reports? Evidence from the Great Postal Strike of 1970

 

Abstract: How important are annual reports to shareholders? Providing causal evidence on this question is challenging because annual reports (i) are available to all shareholders for all firms, (ii) are often confounded by concurrent disclosures, and (iii) have a confirmatory role, besides the informatory role, that may not be fully captured by price reactions to annual report disclosure. In this paper, we exploit the 1970 U.S. postal strike that disrupted the distribution of annual reports to examine the combined loss of their informatory and confirmatory roles. Using a difference-in-differences design we find that, relative to “control” firms, stock trading volume declines by 31% for “treatment” firms that were unable to deliver the annual reports to their shareholders due to the strike. We posit and provide evidence that the decline is due to increased adverse selection problems arising from the non-delivery of annual reports. In addition, return volatility for treatment firms increased by 23% during the strike, but the increase stems primarily from systematic volatility as expected. Overall, our findings reveal the importance of annual reports for capital market participants through mitigating adverse selection problems.