The Proprietary Cost of Disclosure: Evidence from Tracking Copycats’ Digital Footprints

Abstract

This study tackles the empirical challenges of directly testing how companies imitate peers’ strategies from their public disclosures. We track the digital footprints of investment companies that view peer companies’ portfolio holdings disclosures on the SEC EDGAR site and examine their subsequent copycat trading decisions. We find that viewing peer companies’ portfolios significantly increases the likelihood of following peers’ trades; this following is not attributable to other concurrent information sources. Copycat trading is more pronounced when peer portfolio disclosures contain more proprietary information, when copycatting companies are transient traders, and when copycatting and disclosing companies are comparable in their institutional types and portfolio industry focuses. We also discover that copycatting companies possess information-screening abilities for uncovering profitable trades from overall noisy disclosed portfolios. Copycatting companies can identify profitable trades that outperform other disclosed trades by 6.7% annually. Overall, the direct evidence on copycatting activities in this study substantiates a key assumption about the proprietary cost of disclosures in the extant disclosure literature. We also provide the first evidence that the proprietary cost for disclosing companies is not homogenous but rather subject to copycats’ information-screening abilities. Our findings thus provide implications for trade-off of disclosure decision making.