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

The Occurrence and Rate of Protoplasmic Streaming in Greenhouse Plants

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Mutual fund's trading and Chinese mergers and acquisitions

In developing capital markets dominated by individual investors, there is a potential for greater disparity in the interests of institutional investors and controlling shareholders and this has implications for the trading and monitoring activities of institutional investors in these markets, particularly around high impact corporate decisions. We examine the trading activities of mutual funds (as the largest institutional investor in this market) in corporate acquisition activities where there is potential for a wide disparity of interest between institutional investors and controlling shareholders. We find that Top Mutual Fund Management Company (TFC) have strong incentives to trade and realize profits over the event months for fear of price drop due to the mean reversion and herding effect in Chinese capital market

Do Analysts and Investors Efficiently Respond to Managerial Linguistic Complexity on Conference Calls?

This paper examines whether analysts and investors efficiently incorporate the informational cues from managerial linguistic complexity (e.g. Fog) on conference calls into their forecasts and trading decisions. We predict that managers use linguistic complexity to obfuscate before poor future earnings growth, but use linguistic complexity to provide informative disclosure before good future earnings growth. We find that the obfuscation (information) component of managerial Fog on a conference call is negatively (positively) associated with future earnings growth, and that the relations are generally stronger when there is a higher potential for earnings management during the period. We find that analyst forecast revisions efficiently respond to these informational signals in managerial Fog. However, while stock returns around the call are negatively associated with obfuscatory Fog, they are unrelated to informative Fog, which leads to a delayed positive return reaction to informative Fog after the call. Thus, while both analysts and investors appear to process the negative signal of managerial obfuscation, only analysts correctly interpret the positive signal of greater linguistic complexity due to more informative disclosure

Do Analysts and Investors Efficiently Respond to Managerial Linguistic Complexity during Conference Calls?

This paper examines whether analysts and investors efficiently incorporate the informational signals from managerial linguistic complexity (e.g. Fog) into their forecasts and trading decisions. We predict that managerial linguistic complexity on a conference call provides a signal of the manager’s private information through their willingness to engage with analyst questions. Consistent with this engagement mechanism, we show that linguistic complexity evolves over the course of the call, with informative (uninformative) calls exhibiting more (less) informative technical disclosure as the call progress. We find that informative (obfuscatory) managerial Fog provides a positive (negative) signal of future earnings growth. We also find that analysts efficiently revise their forecasts to both positive and negative signals, whereas investors only correctly interpret obfuscation during the call; there is a delayed price reaction to informative Fog. However, when buy-side investors ask questions during a call, we find an efficient price reaction to informative Fog. Our findings highlight an important benefit of two-way interactive disclosures and underline the importance of call participation for efficiently incorporating linguistic signals of managers’ private information

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