More Questions Than Answers? Assessing The Impact Of Firm Interaction With Retail Investors On Bid-ask Spreads

Abstract

Retail investors are rising in prominence, but have historically been granted little direct access to question corporate management relative to professionals like sell-side analysts and institutional investors. Because retail investors are relatively less sophisticated and can require hand-holding, we examine whether information asymmetry among investors decreases when firms answer questions from the retail investor base. To examine this issue, we exploit China’s investor interactive platforms (IIPs), which were designed to facilitate retail investor access to management, allow questions to be anonymously and publicly posted, and require a public firm response. We find that IIP answers reduce bid-ask spreads incremental to IIP questions, with stronger answer effects when managers respond quickly, provide a high-quality answer, and answer a question from IIP users who focus on the firm. We also show that the information asymmetry reduction benefits of answering questions are substantially attenuated for state-owned enterprises, who have less incentive to publicly engage with retail investors. Finally, our findings reveal that the marginal effects of firm answers are generally smaller than for posted questions, suggesting that while firms benefit from answering questions to lower investor integration costs, IIP activity that lowers awareness and acquisition costs is also important.