Do Institutional Investors Prefer Near-Term Earnings Over Long-Run Value?

This paper examines whether institutional investors exhibit preferences for near-term earnings over long-run value and whether such preferences have implications for firms\u27 stock prices. First, I find that the level of ownership by institutions with short investment horizons (e.g., “transient” institutions) and by institutions held to stringent fiduciary standards (e.g., banks) is positively (negatively) associated with the amount of firm value in expected nearterm (long-term) earnings. This evidence raises the question of whether such institutions myopically price firms, overweighting short-term earnings potential and underweighting long-term earnings potential. Evidence of such myopic pricing would establish a link through which institutional investors could pressure managers into a short-term focus. The results provide no evidence that high levels of ownership by banks translate into myopic mispricing. However, high levels of transient ownership are associated with an over- (under-) weighting of near-term (long-term) expected earnings, and a trading strategy based on this finding generates significant abnormal returns. This finding supports the concerns that many corporate managers have about the adverse effects of an ownership base dominated by short-term-focused institutional investors

Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility

This paper investigates whether the quality of a firm’s disclosure practices affects the composition of a firm’s institutional investor base and whether this association has implications for a firm’s stock return volatility. The findings indicate that firms with higher disclosure quality, as measured by AIMR rankings, have greater institutional ownership, but the particular types of institutional investors that are attracted to disclosure quality tend to have no net impact on firms’ stock return volatility. In contrast, improvements in disclosure quality are shown to produce contemporaneous increases in ownership primarily by transient-type institutions. Such institutions can be characterized as having a short-term investment focus along with a propensity to trade aggressively. The findings indicate that firms with disclosure quality improvements resulting in higher transient institutional investor ownership experience subsequent increases in stock return volatility

Which Institutional Investors Trade Based on Private Information About Earnings and Returns?

Recent work suggests that institutional investors execute profitable trades based on private information about earnings and returns. We provide new evidence on the prevalence and sources of such informed trading by (1) testing for the creation and liquidation of positions based on private information, (2) introducing private information proxies that reflect the size and nature of an institution\u27s position in each portfolio firm, and (3) using a methodology that examines multiple investor characteristics simultaneously at the institution-firm level. We find that changes in ownership by institutions with large positions in a firm are consistent with informed trading. However, other previously documented proxies for private information produce results more consistent with risk-based trading (e.g., investment style) or insignificant in the presence of other proxies (e.g., fiduciary type). We also find that informed trading is more prevalent in small firms and when the large positions are taken by investment advisers and large institutions

Disclosure Standards and the Sensitivity of Returns to Mood

We provide evidence that higher-quality disclosure standards are associated with stock returns that are less sensitive to noise driven by investors\u27 moods. We identify return-mood sensitivity (RMS) based on the association between index returns and urban cloudiness, a source of short-term variation in mood. Based on a stylized model, we predict and find evidence consistent with higher-quality disclosure standards reducing RMS by tilting susceptible investors\u27 trades toward information and by facilitating sophisticated investors\u27 arbitrage. Our findings suggest that disclosure standards play an important role in enhancing price efficiency by reducing noise in returns, particularly noise related to investors\u27 short-term moods

Accounting Choice, Home Bias, and U.S. Investment in Non-U.S. Firms

This paper examines the relation between accounting choice and U.S. institutional investor ownership in non-U.S. firms. We predict that U.S. investors exhibit home bias in their preference for accounting methods conforming to U.S. Generally Accepted Accounting Principles (GAAP) because such methods are more familiar, reduce information processing costs, and are perceived as higher quality. We find that firms exhibiting higher levels (changes) of U.S. GAAP conformity have greater levels (changes) of U.S. institutional ownership. Lead-lag regressions suggest that increases in U.S. GAAP conformity precede increases in U.S. investment, but changes in U.S. institutional holdings do not precede changes in accounting methods. We also find that the positive relation between U.S. GAAP conformity and U.S. investment holds regardless of a firm\u27s visibility to U.S. investors (e.g., American Depositary Receipt listing, stock index membership, analyst following, firm size). However, we find that U.S. GAAP conformity has a significantly greater impact among firms already visible to U.S. investors

Open Versus Closed Conference Calls: The Determinants and Effects of Broadening Access to Disclosure

Recent advances in information technology allow firms to provide broader access to their disclosures. We examine the determinants and effects of the decision to provide unlimited real-time access to conference calls (i.e., “open” conference calls). Our evidence suggests that the decision to provide open calls is associated with the composition of a firm\u27s investor base and, to some degree, the complexity of its financial information. We also find that open calls are associated with a greater increase in small trades (consistent with individuals trading on information released during the call) and higher price volatility during the call period

The Role of the Business Press as an Information Intermediary

This paper investigates whether the business press serves as an information intermediary. The press potentially shapes firms\u27 information environments by packaging and disseminating information, as well as by creating new information through journalism activities. We find that greater press coverage reduces information asymmetry (i.e., lower spreads and greater depth) around earnings announcements, with broad dissemination of information having a bigger impact than the quantity or quality of press-generated information. These results are robust to controlling for firm-initiated disclosures, market reactions to the announcement, and other information intermediaries. Our findings suggest that the press helps reduce information problems around earnings announcements

Return Predictability: The Dual Signaling Hypothesis of Stock Splits

This paper aims to differentiate between optimistic splits and overoptimistic/opportunistic splits. Although markets do not distinguish between these two groups at the split announcement time, optimistic (over-optimistic/opportunistic) splits precede positive (negative) long-term buy-and-hold abnormal returns. Using the calendar month portfolio approach, we show that the zero-investment, ex-ante identifiable, and fully implementable trading strategy proposed in this paper can generate economically and statistically significant positive abnormal returns. Our findings indicate that pre-split earnings management and how it relates to managers’ incentives, is an omitted variable in the studies of post-split long-term abnormal returns