The Effects of Conservative Reporting on Investor Disagreement

We examine whether the level of a firm's conditional conservatism affects investor disagreement around earnings announcement dates. Investor disagreement is relevant for its repercussions on stock market efficiency. However, the literature related to the effect of firms’ reporting policies on disagreement is scant. Prior research suggests that conservatism, by requiring higher verifiability of profits, constrains earnings overstatements and encourages more complete revelations of losses, thus improving the information environment. In this paper, we further hypothesize that these effects of conservatism enhance news credibility and decrease information asymmetry, particularly for bad news announcements. This results in a lower disagreement and improved interpretation of earnings news. We consistently find that conservatism measures are negatively associated with proxies of announcement-time investor disagreement and that this effect is stronger when the firm is reporting bad news. Additional analyses indicate that the impact of conservatism is stronger when market surprise to the announcement is greater, while it is weaker in the presence of frequent and precise voluntary disclosure that preempts the earnings announcement. Finally, we show that a higher percentage of institutional investors’ ownership and a higher level of commitment to conservatism reinforce the impact of the latter.     

The Effect of Religion on Accounting Conservatism

This paper investigates whether religiosity, a key informal institutional factor, strongly influences a firm’s adoption of accounting conservatism. Using a sample from the U.S. stock market, we find that firms located in geographic areas with higher levels of religiosity tend to exhibit greater accounting conservatism. Further tests show that this effect is through the channel of engaging managers in activities that emphasize firms’ long-term growth, concern stakeholder interests, and avoid the risk of litigation. Moreover, we demonstrate that it is the religious environment in an area rather than the personal religious belief of a CEO that drives our baseline results. Finally, a supplementary test suggests that religiosity increases not only the conditional (ex post) conservatism of firms but their unconditional (ex ante) conservatism as well.     

机构投资者、会计稳健性与企业投资效率——来自中国A股市场的经验证据

选取2006—2014年度沪深A股8972个公司年度数据作为样本,对机构投资者、会计稳健性与企业投资效率三者之间的关系进行研究,结果表明：会计稳健性显著地改善了企业投资效率;相比于交易型机构投资者,稳定型机构投资者促进会计稳健性改善企业投资效率的功效更强。研究结论验证了会计稳健性改善企业投资效率的定价与治理功能的对称性,并证实了机构投资者促进会计稳健性,进而改善企业投资效率的定价与治理功能的观点。     

Investor heterogeneity and commonality in stock return and liquidity

This paper examines how the trading activities of different investor types are related to common return and liquidity movements. Using a unique dataset, we decompose the daily return and liquidity of individual stocks into price impact components attributable to trades of institutional investors and retail investors. We then investigate the variation of each component relative to market-wide return and liquidity. We show that institutional trades contribute more than retail trades to liquidity commonality. However, retail trades contribute more strongly to return co-movement. The incremental contribution of retail trades to the co-variability of stock returns is more pronounced for firms with high information asymmetry.     

The impact of private benefits on institutional ownership change: evidence from markets with different sentiments

This study investigates the relationship between private benefits and institutional ownership change in markets characterized by different investors’ sentiments. High-sentiment markets tend to overvalue a firm and thereby offer institutional investors a chance to sell shares and profit from overvaluation by forgoing the private benefits otherwise obtainable. Empirical analysis of ownership data from 1990 to 2008 reveals that, in high-sentiment markets, institutional investors sell more shares low in private benefits (dual-class firm share) than shares high in private benefits (non-dual-class firm share). In contrast, firm insiders, who consume significant private benefits in both dual-class and non-dual class firms, sell more dual-class firm shares in both high- and low-sentiment markets. Their ownership disposition is more likely driven by the need for diversification. Subsample analyses show that public pension funds drive the market-sentiment-related change of institutional ownership.     

Smart money or dumb money? A study on the selection ability of mutual fund investors in China

We examine investors’ mutual fund selection ability in China. Using actively managed equity mutual funds between 2005 and 2011, we find that Chinese investors generally have no mutual fund selection ability, a result contrary to the smart money effect in the United States. We show that mutual funds that receive more new money subsequently underperform significantly. The findings are robust to several risk-adjusted performance measures. The unique data of China provide separate accounts of institutional and individual investors’ new money flowing into and out of mutual funds, allowing us to examine the mutual fund selection ability of institutional and individual investors. We document that institutional investors exhibit a smart money effect, that is, they are able to move new money into (out of) future good (poor) performers. In contrast, individual investors exhibit a dumb money effect. Our results provide useful information for regulators to review their rules, especially for the protection of individual investors regarding mutual fund investing in China. In addition, we show that it is useful to distinguish institutional and individual investors in mutual fund research.     

Institutional investors’ ownership stability and their investee firms’ equity mispricing

This study examines the impact of institutional investors' equity ownership stability and their investment horizon to determine the impact on their investee firms' equity mispricing. Mispricing represents the difference between a firm’s market and fundamental values. We treat institutional investors as a heterogenous group, i.e., dedicated, transient, or quasi-indexer as defined by Bushee, 1998, Bushee, 2001 since their categorization determines their trading strategy. Higher institutional ownership, higher stability in institutional investors' equity ownership, and institutional investors classified as long-term are all associated with lower equity mispricing at investee firms.     

投资者监督、政府干预与企业价值——基于机构投资者的经验证据

文章通过模型证明大投资者(Blockholders)与个人投资者相比对上市公司实施更多的监督,并且大投资者的监督行为能够增加企业价值;但模型也表明机构投资者是否实施监督及其为企业带来的价值增量取决于监督的成本和收益。文章利用中国资本市场的机构投资者数据,检验了理论模型的四个基本结论。结果表明:机构投资者比个人投资者更积极地监督上市公司,并有助于提高企业价值;政府干预(用上市公司最终控制人为政府代表)减少了机构投资者监督的收益,降低了机构投资者对企业价值所起到的正面作用,削弱了机构投资者监督的积极性。研究结论表明,发展机构投资者有助于改善上市公司的治理水平,提升企业价值;但是政府干预限制了机构投资者的积极公司治理作用。     

Institutional investors, antitakeover defenses and success of hostile takeover bids

In this study we investigate the question of whether institutional investors enhance or reduce efficiency in the market for corporate control. In particular, given unequivocal evidence that target stockholders gain in successful takeover bids, we investigate the impact of institutional ownership in target firms on the adoption of the type of antitakeover defense as well as the outcome of takeover bids. We find that target firms are more likely to adopt value-reducing antitakeover defenses and successfully thwart takeover bids when a higher percentage of target common stock is owned by ‘pressure-indeterminate’ investors (investment counsel firms in particular). On the other hand, the probability of a successful takeover rises with the ownership of both ‘pressure-sensitive’ and ‘pressure-resistant’ investors. The above findings support the view that institutional investors do not play a homogeneous role in the market for corporate control.     

Cross listing,disclosure regimes,and trading volume sensitivity to stock returns

In this paper, we propose that investors of cross-listed firms use trading volume to revise their perception of firms’ value. We further propose that firms that cross list from low-disclosure regimes (usually from emerging economies) have higher trading volume sensitivity to returns than those that cross list from high-disclosure regimes (usually from developed economies), as those from low-disclosure regimes have relatively lax and less stringent disclosure requirements. We use a sample of foreign firms that are cross listed in the U.S. as exchange-listed American Depositary Receipts, adopted the international financial reporting standards (formerly international accounting standards), and filed Form 20-F reconciliation with the U.S. Securities and Exchanges Commission during the period of 1994–2005. Using these firms and a matched-sample of U.S. firms based on exchange, industry and firm size, we document results supporting our hypotheses. Our results have implications for policy makers, regulators and academics.     

Collective rationality and functional wisdom of the crowd in far-from-rational institutional investors

The average portfolio structure of institutional investors is shown to reproduce the structure which optimally accounts for transaction costs when investment constraints are weak. Strikingly, this result emerges even though these investors are not aware of the existence of such law and despite the fact that their aims and tools are very heterogeneous. This extends the so-called wisdom of the crowd to much more complex situations in two important ways. First, wisdom of the crowd also holds for whole functions instead of a point-wise estimates. Second, this shows that in socio-economic systems, the optimal individual choice may only be found when the diversity of individual decisions is averaged out. Thus, rationality at a collective level does not need nearly rational individuals with well-aligned incentives. Finally we discuss the importance of accounting for constraints when assessing the presence of wisdom of the crowd.

     

Shareholder Activism and Earnings Management Incentives: An Empirical Examination of Shareholder Proposals in the United States

In this article, we investigate the effect of shareholder activism on earnings management. Using a US sample of shareholder pay‐for‐performance proposals sponsored by institutional investors, we find that when compared to control firms, firms targeted by shareholder proposals have a greater magnitude of discretionary accruals (DA) in their reported earnings. In addition, we find that the likelihood of meeting or beating earnings benchmarks through the use of DA is higher for targeted firms whose managers have job security concerns due to the firms’ inferior stock performance in the past or have plans to sell company stock. Our results are consistent with the notion that pay‐for‐performance proposals have unintended consequences by introducing or exacerbating incentives to manage earnings for short‐term gains. The results also indicate that, for financial reporting, the short‐termism effect may dominate the alignment and/or disciplinary effect of shareholder monitoring.     

An Examination of the Naïve‐Investor Hypothesis in Accruals Mispricing in Tunisian Firms

This study extends previous studies on accrual anomaly to investigate the emerging market's mispricing of accruals. Using Mishkin (1983) test, hedge portfolio test and Fama and MacBeth (1973) regression, we test whether the Tunisian Stock Exchange price rationally reflects the 1‐year ahead earnings implications of its earnings components. We find that earnings and their cash flow and accrual components are not rationally priced by the market. Additionally, this paper examines the role of sophistication investors in the pricing of earnings and their components. Our results show that accruals for firms with higher level of institutional ownership are not mispriced, while accruals for firms with lower institutional ownership are overpriced significantly by the market.     

Investor visits to corporate sites and cost stickiness

A corporate site visit is an effective way to obtain information on a firm. Most studies focus on the information advantages of corporate site visits, but evidence of their impact on firm operations is limited. In this paper, we investigate whether investors’ corporate site visits affect cost stickiness. Using data on investor corporate site visits to Chinese listed firms from 2013 to 2018, we find that these visits can inhibit cost stickiness. This finding holds in robustness tests and when controlling for endogeneity, including firm fixed effects, and using the Heckman selection model and the instrumental variables method. Further analyses reveal this inhibition is more pronounced for nonstate-owned enterprises and the results are more significant regarding cost stickiness in firms consuming nonlabor materials and firms visited by institutional investors. Moreover, we explore plausible mechanisms through which corporate site visits inhibit cost stickiness, such as through a monitoring channel and a learning channel. Our study contributes to academic evidence on the benefit and value of corporate site visits to firm operations, showing these visits can be a useful way to build connections between investors and firms.     

Private Benefits of Control and Dual‐Class Share Unifications

This paper examines the decision to unify dual‐class shares into a single class. Using a sample of firms from seven European countries, we find that measures of lower private benefits of control available to the controlling shareholders, such as low separation between control and cash flow centers, the presence of financial investors, and cross‐listings, increase the likelihood of a unification of share classes. Unifications are also more likely in firms with higher growth opportunities that need external financing. Changes in the institutional environment aimed at limiting the powers of controlling shareholders are positively related to unifications. Increases in firm valuation are found for the year following unifications. Copyright © 2011 John Wiley & Sons, Ltd.     

The Impact of Mandatory IFRS Adoption on Equity Valuation of Accounting Numbers for Security Investors in the EU

Motivated by the European Union (EU) decision to mandate application of the International Financial Reporting Standards (IFRS) to the consolidated financial statements of all EU listed firms (Regulation (EC) 1606/2002), starting in December 2005, we compare the value relevance of accounting information in 14 European countries in the year prior to and the year of the mandatory adoption of the IFRS. We focus on three accounting information items for which measurements under IFRS are likely to differ considerably from measurements under domestic accounting practices across the EU countries prior to the introduction of the international standards: goodwill, research and development expenses (R&D), and asset revaluation. These three items, selected on an a priori basis, have been shown in previous research to differ in the effect of uncertainty on their future benefits. We use valuation models that include these three variables and in addition the book value of equity and earnings. Overall, our study suggests that the adoption of the IFRS has increased the value relevance of the three accounting numbers for investors in equity securities in the EU. Association tests support our two hypotheses: (1) in the year prior to the mandatory adoption of the IFRS, the incremental value relevance to investors of the three domestic GAAP-based accounting items was greater in countries where the respective domestic standards were more compatible with the IFRS; and (2) the higher the deviation of the three domestic GAAP-based accounting items from their corresponding IFRS values, the greater the incremental value relevance to investors from the switch to IFRS. These associations prevail when considering cross-country differences in the institutional environments, which tend to provide complementary effects.     

Are institutional investors colluding with manipulators?

This paper examines the trading behavior of institutional investors in Taiwan before, during, and after a manipulation event and determines whether institutional investors benefit from their trading behavior during the period from the year 2000 to 2020. We find that stocks with a low turnover and small market capitalization are the main targets of price manipulators. In addition, the stock price of manipulated firms increases from the start date of the manipulation event, peaks at the end of the event, then falls after the event. Foreign institutions collude with manipulators to exaggerate stock prices for self-benefit. In contrast, securities dealers counter the trading behavior of manipulators and act as market stabilizers, causing them to suffer losses. Moreover, foreign institutions earn higher returns on stocks of manipulated firms with a low turnover during and soon after manipulation; however, they earn a higher return on stocks of manipulated firms with a high turnover in the long run after manipulation.     

Voluntary adoption of non-local GAAP in the European Union: A study of determinants and consequences

Abstract

This study examines the determinants and consequences of voluntary adoption of non-local accounting principles (non-local GAAP) by firms listed and domiciled in the European Union (EU). We restrict ourselves to the two predominant internationally accepted sets of accounting standards: International Accounting Standards (IAS) and United States generally accepted accounting principles (US GAAP). We have used various sources to identify EU firms that use non-local GAAP. We examine the 1999 annual reports of all these firms, because accounting standard choices in more recent years may be affected by the announcement of the proposal by the European Commission in February 2001 to mandate IAS usage from 2005 on. The maintained hypothesis is that firms that voluntarily adopt IAS or US GAAP expect to experience net benefits from adoption. The finding that 133 non-financial firms in the EU voluntarily used non-local GAAP in 1999 suggests that the majority of listed EU firms does not expect to benefit from non-local GAAP adoption. By studying the characteristics of non-local GAAP adopters this study provides insight into the determinants of non-local GAAP adoption. We find that firms voluntarily using non-local GAAP are more likely to be listed on a US exchange, the EASDAQ exchange in Brussels, and have more geographically dispersed operations. Furthermore, they are more likely to be domiciled in a country with lower quality financial reporting and where IAS is explicitly allowed as an alternative to local GAAP. We also study whether non-local GAAP adopters have lower levels of information asymmetry, a much cited benefit of using more transparent financial reporting, than non-adopters. We examine three proxies for information asymmetry: analyst following, cost of equity capital, and uncertainty among analysts and investors (forecast dispersion and stock return volatility). We document a positive effect of non-local GAAP adoption on analyst following, but fail to find evidence of a lower cost of capital for non-local GAAP adopters. Contrary to expectations, uncertainty among analysts and investors appears to be higher for firms using IAS or US GAAP than for firms using local GAAP. However, by comparing ‘early’ and ‘late’ adopters, we find some evidence that suggests that benefits take some time to fully materialise.     

Political Connections and Accounting Quality under High Expropriation Risk

Abstract

We examine the impact of political connections and accounting quality among Venezuelan industrial firms, which face one of the highest levels of expropriation risk worldwide. Based on prior literature, we expect a negative relationship between expropriation risk and accounting quality as firms manage earnings to avoid ‘benign’ state intervention. We find that politically connected firms have higher accounting quality than non-connected firms, which is consistent with connected firms’ lower risk of expropriation due to connections with high-level government officials or ruling party members. The relationship between accounting quality and political connections appears to be strongly moderated by institutional features like expropriation risk.     

A Comparison of Relations Between Security Market Prices, Returns and Accounting Measures in Japan and the United States

We examine associations between accounting measures of earnings and stock returns in Japan over varying window lengths and compare them to those for the United States. Our results are consistent with the view that Japanese investors utilize less accounting information in their pricing of equities than do their U.S. counterparts. This was particularly evident in the 'boom' period of the mid to late 1980s when the fundamental values conveyed by accounting measures appear to have been largely ignored. The association increases with the inclusion of 1991, suggesting a return to more emphasis on fundamentals with the recent decline in stock prices.