Disclosure

Copycat Skills and Disclosure Costs: Evidence from Peer Companies’ Digital Footprints

2020 JAR, Sean Cao (Georgia State), Kai Du (Pennsylvania State), Baozhong Yang (Georgia State), Alan L. Zhang (Georgia State)

The disclosure literature has studied proprietary costs by focusing on the disclosing firms and their disclosure decisions, while offering limited insights into peer companies’ copycatting behavior. In this paper, we examine whether copycats profit from imitating peer companies, the sources of their copycatting skills, and more importantly, under what conditions copycats cause competitive harm and impose proprietary costs on disclosing companies.

• We identify copycatting companies by tracking the digital footprints of investment companies that view disclosures on the SEC EDGAR website.

• We find that, from the voluminous peer disclosures, copycat companies are able to identify profitable trades that outperform other disclosed trades by 5.5% annually. Such stock-screening skills are related to their sophistication and the intensity of their research.

• Finally, we find that proprietary costs are not homogeneous but rather depend on the characteristics of both the copycats and the disclosed information.

• Copycats inflict greater damage on the performance of disclosing companies when they possess greater skills, when disclosed trading strategies take longer to complete, and when disclosed stock holdings are characterized by high information asymmetry.

Despite the capital market benefits of greater transparency, public disclosures may reveal proprietary information that ultimately works to the advantage of competitors. Competing firms can view and imitate a disclosing firm’s strategies, which is known as “copycatting.”

We construct a treatment group of companies that view peers’ 13F disclosures on EDGAR and a control group of non-viewing companies that could potentially execute coincidental trades without seeing peers’ 13F disclosures.

Information on organizational IP addresses comes from the Whois database of the American Registry for Internet Numbers (ARIN). To study trading activities, we observe that a change in an investment company’s holding of a stock may take one of four forms: (i) initiating a new position (i.e., from 0 to a positive holding of the stock, known as a “first buy”); (ii) closing out the position (i.e., from a positive holding to 0, or a “last sell”); (iii) increasing a current position; and (iv) reducing a current position without liquidating the position.