Investor Trust, Information Acquisition, and Voluntary Disclosure

Investors cannot independently verify reported earnings, so relying on them rests in part on trust. We ask whether the community-level trust of a firm’s institutional investors substitutes for scrutiny of its filings, and whether managers disclose less to a more trusting audience. We combine a survey-based measure of trust in each institution’s headquarters community with geolocated EDGAR requests for a firm’s filings around its earnings announcements, comparing communities that face the same news but differ in trust. Requests rise with a community’s portfolio stake in the firm, and more trusting communities request more filings overall, as prior work on attention and market participation would predict. But requests from more trusting communities respond proportionally less to their stake, suggesting that trust substitutes for scrutiny. This attenuation is greater when uncertainty about earnings is high, consistent with investors leaning more on their priors about the reporter when earnings are more difficult to predict or evaluate. Firms with more trusting investors issue less management guidance, whereas trust in a firm’s own community is associated with a higher likelihood of issuing forecasts, consistent with prior cross-country evidence. The evidence points to a two-sided role for trust in which the trustworthiness of the reporter’s environment encourages disclosure, while the trusting disposition of its audience substitutes for scrutiny.