Internal Governance Does Matter to Equity Returns but Much More So During “Flights to Quality”

Although few doubt that good internal governance helps firms perform better, the statistical evidence is actually mixed because the positive effects of good corporate governance matters much more so at some times than others. The statistical link is strongest during “flights to quality,” when market sentiment turns bearish and pessimistic but weakens for long periods of time during bull markets and low market volatility. Using more than ten years' evidence from Australian firms, the authors show that internal governance is related to both firm value and performance and that firms with stronger governance are less risky, generate higher equity returns and perform significantly better during market downturns. When risk aversion is high, demand for well‐governed firms increases and investors discount the value of firms with potential agency conflicts. This time‐varying relationship between internal governance and returns may explain both the limited explanatory power of governance on firm value and the mixed empirical evidence reported in previous studies. Firms with strong internal governance do earn significantly higher stock returns compared with firms with weak governance; but that also means that the value of governance is not fully incorporated into prices, thereby explaining the limited explanatory power of governance on firm value.     

Insider ownership and signals: evidence from stock split announcement effects

This study examines whether investors regard the level of insider ownership of a firm as useful for evaluating stock split decisions. Results show that the abnormal returns at the announcement of stock splits are positively related to the level of insider ownership. The results prevail even after controlling for other relevant factors. Further analysis indicates the positive relation exists for small firms, but not for large firms. This indicates the market evaluates stock split decisions within the context of both insider ownership and information asymmetry.     

“Rookies to the stock market: A portrait of new shareholders”

This study examines individuals entering the stock market, “rookies.” The study uses unique ownership data, containing investor holdings of all listed Swedish firms over the sample period from 2004 to 2010, to examine rookies’ stock portfolios. In addition, this study explores investor sophistication among rookies, based on individual characteristics and portfolio composition. Although the average shareholder is aging and leaving the stock market, this study shows there are signs of rejuvenation, with rookies entering the stock market. The results show that the majority of rookies hold under-diversified stock portfolios and choose one large firm as their first stock market investment. Rookie characteristics display gender differences, in which the average female rookie has lower income, is older, but holds a larger stock portfolio than her male counterpart.     

The price impact of foreign institutional herding on large-size stocks in the Taiwan stock market

This study constructs a panel threshold regression model to explore the price impact of foreign institutional herding of firms listed in the Taiwan Stock Exchange during January 2000 to June 2008. Our panel threshold model is constructed to explore the price impact of foreign institutional investors?? herding in the Taiwan stock market after controlling the firm size. By examining the presence of threshold effect, this study analyzes whether firm size would obviously and asymmetrically affect the explanation for the effect of changes in foreign investors?? share ownership on abnormal returns. The empirical results of this study find the significant evidence of threshold effect which divides the stocks into large-size and small-size firms. It is found that foreign institutional investors in the Taiwan stock market tend to hold large-size stocks listed in the Taiwan Stock Exchange. There is an apparent increase in the subsequent abnormal returns on large-size stocks bought in bulk by foreign investors. The signals of changes in share ownership initiated by foreign institutional investors would reveal further information for improving the performance of asset reallocation decisions in Taiwan. The panel threshold model constructed in this paper well describes the price impact of institutional herding yet eschews the possibly subjective data snooping issue resulting from the two-pass sorting method as proposed by previous related researches.     

Do Voting Rights Affect Institutional Investment Decisions? Evidence from Dual‐Class Firms

We examine whether, and to what extent, shareholder voting rights affect institutional investment decisions. We find that institutional ownership in dual‐class firms is significantly lower than it is in single‐class firms after controlling for other determinants of institutional investment. Although institutions of all types hold fewer shares of dual‐class firms, this avoidance is more pronounced for long‐term investors with strong fiduciary responsibilities than for short‐term investors with weak fiduciary duties. Following the unification of dual‐class shares into a single class, institutional investors increase their shareholdings in the unifying firm. Overall, our results suggest that voting rights are an important determinant of institutional investment decisions.     

Informational Feedback,Adverse Selection,and Optimal Disclosure Policy

Faceless trading in a secondary stock market not only redistributes wealth among investors but also generates information that feeds back to real decisions. Using this observation we re‐evaluate the “leveling‐the‐playing‐field” rationale for disclosure to secondary stock markets. By partially preempting traders' information advantage established from information acquisition, disclosure reduces private incentives to acquire information, resulting in two opposite effects on firm value. On one hand, this narrows the information gap between informed and uninformed traders and improves liquidity of firm shares. On the other hand, this reduces the informational feedback from the stock market to real decisions. This tradeoff determines the optimal disclosure policy. The model explains why firm value can be higher in an environment that simultaneously promotes disclosure and private information production and why growth firms are endogenously more opaque than value firms.     

Advertising and Investor Recognition of Banking Firms: Evidence from Taiwan

This study examines the effect of advertising expenditure on strengthening a firm’s intangible capital and firm value by attracting the public on the firm’s visibility and then investigates the role of advertising expenditures on a banking firm’s market value, liquidity, and breadth of ownership. The empirical results find that the advertising has a significantly positive effect on banking firm’s share value, liquidity, and institutional holdings. Consequently, this study concludes that advertising benefits banking firms through increased investor perceptions of such firms. In particular, the findings provide additional support for the home bias phenomena, in which investors prefer to invest in familiar stocks.     

The Dark Side of International Cross‐Listing: Effects on Rival Firms at Home

We analyse the stock price impact of firms' US cross‐listing on home‐market rival firms. Using an empirical event study approach we find negative cumulative average abnormal returns for the rival firms around both the listing and announcement of listing dates. The evidence suggests both positive and negative spillover effects on rival firms, where the dominant effect is that investors see rivals at a relative disadvantage to the cross‐listing firm. As firms cross‐list in the US and commit to the increased disclosure and investor protection associated with the US listing, they are better able to take advantage of growth opportunities relative to their non cross‐listing counterparts, and this results in negative spillover effects on rival firms. Our results are consistent with the idea that firms cross‐list as a means to reduce agency costs of controlling shareholders and thus are able to exploit growth opportunities as they have better access to external finance.     

Investor Conferences,Firm Visibility,and Stock Liquidity

We examine the influence of investor conferences on firms’ stock liquidity. We find that firms participating in conferences experience a 1.4% to 2.8% increase in stock liquidity compared to nonconference firms. Consistent with investor conferences improving firm visibility, the increase in liquidity is larger for firms with low pre‐conference visibility and varies predictably with conference characteristics that affect the ability of investors to revise their beliefs about the firm. However, for firms with a large investor base and high visibility, conference participation is associated with a decline in stock liquidity, consistent with investor conferences exacerbating the information asymmetry among investors.     

Competition For Board Seats Following Stock‐For‐Stock Mergers

We examine the board structure of firms following stock‐for‐stock mergers. We find that former target inside (outside) directors are more likely to join the combined firm board when target insiders (outsiders) have a relatively strong position on the pre‐merger target board. The relative size of the target firm, target firm profitability, and target blockholder ownership also influence whether target directors join the combined board. We conclude that competition for board seats on the combined board is won by target directors with greater bargaining positions.     

Does institutional ownership increase stock return volatility? Evidence from Vietnam

The literature on institutional ownership and stock return volatility often ignores small emerging countries. However, this issue is more profound, due to the large size of institutional investors and small stock market size, in emerging equity markets. This paper examines the effects of the institutional ownership on the firm-level volatility of stock returns in Vietnam. Our data cover most of non-financial firms listed on the Ho Chi Minh City stock exchange for the period 2006–2012. Employing different analysis techniques for panel data and controlling for possible endogeneity problems, our empirical results suggest that institutional investors stabilize the stock return volatility. Moreover, we document that: i) the stabilizing effect of institutional investor ownership is higher in dividend paying firms, and ii) if firms are paying out more dividends, this stabilizing effect is greater. Our results outline the important role of institutional investors in maintaining the stability in emerging stock markets.     

The impact of institutional ownership on corporate operating performance

This paper examines the relation between institutional investor involvement in and the operating performance of large firms. We find a significant relation between a firm’s operating cash flow returns and both the percent of institutional stock ownership and the number of institutional stockholders. However, this relation is found only for a subset of institutional investors: those less likely to have a business relationship with the firm. These results suggest that institutional investors with potential business relations with the firms in which they invest are compromised as monitors of the firm.     

Market Segmentation and Cross‐predictability of Returns

We present evidence supporting the hypothesis that due to investor specialization and market segmentation, value‐relevant information diffuses gradually in financial markets. Using the stock market as our setting, we find that (i) stocks that are in economically related supplier and customer industries cross‐predict each other's returns, (ii) the magnitude of return cross‐predictability declines with the number of informed investors in the market as proxied by the level of analyst coverage and institutional ownership, and (iii) changes in the stock holdings of institutional investors mirror the model trading behavior of informed investors.     

Institutional investor networks and firm innovation: Evidence from China

We examine the impact of institutional investor networks on firm innovation in China. Employing the unexpected departure of mutual fund managers and the inclusion of the Shanghai-Shenzhen 300 index as identifications, we find that institutional investor networks have a positive impact on firm innovation. Specifically, firms that are hold by well-connected institutional investors are motivated to make R&D investments and receive greater patents than their counterparts. This positive influence is more pronounced for non-SOEs and for firms located in less-developed regions, indicating that institutional investor networks act as information flow facilitator and a value certifier to encourage innovation activities.     

Does favorable investor sentiment lead to costly decisions to go public?

We investigate the real effects of decisions to undertake an initial public offering of stock in periods of favorable investor sentiment. Specifically, we examine potential effects of favorable investor sentiment on investment expenditures and how effects on investment affect firm operating performance and value as well as the likelihood of survival. We find that firms going public during periods of favorable sentiment, on average, spend substantially more on investments, especially acquisitions, than firms going public in other periods. The effect of favorable investor sentiment on investment is more pronounced for younger firms. We do not find, however, that the higher investment spending in the wake of favorable sentiment leads to worse operating or stock performance. Stock returns around acquisitions announcements are also positive for firms going public in favorable sentiment periods. The preponderance of our findings indicate that decisions to go public in favorable investor sentiment periods do not lead to corporate investment decisions that harm firm performance and value.     

Firm size,ownership structure,and systematic liquidity risk: The case of an emerging market

Previous studies support the hypothesis that institutional ownership leads to an enhanced systematic liquidity risk by increasing the commonality in liquidity. By using a proprietary database of all incoming orders and ownership structure in an emerging stock market, we show that institutional ownership leads to an increase in commonality in liquidity for mid- to-large cap firms; however, only individual ownership can lead to such an increase for small cap firms, revealing a new source of systematic liquidity risk for a specific group of firms. We also reveal that commonality decreases with the increasing number of investors (for both individual and institutional) at any firm size level; suggesting that as the investor base gets larger, views of market participants become more heterogeneous, which provides an alternative way to decrease the systematic liquidity risk.     

The Rise of Agency Capitalism and the Role of Shareholder Activists in Making It Work

The past 50 years have seen a fundamental change in the ownership of U.S. public companies, one in which the relatively small holdings of many individual shareholders have been supplanted by the large holdings of institutional investors, such as pension funds, mutual funds, and bank trust departments. Such large institutional investors are now said to own over 70% of the stock of the largest 1,000 U.S. public corporations; and in many of these companies, as the authors go on to note, “as few as two dozen institutional investors” own enough shares “to exert substantial influence, if not effective control.” But this reconcentration of ownership does not represent a complete solution to the “agency” problems arising from the “separation of ownership and control” that troubled Berle and Means, the relative powerlessness of shareholders in the face of a class of “professional” corporate managers who owned little if any stock. As the authors note, this shift from an era of “managerial capitalism” to one they identify as “agency capitalism” has come with a somewhat new and different set of “agency conflicts” and associated costs. The fact that most institutional investors hold highly diversified portfolios and compete (and are compensated) on the basis of “relative performance” provides them with little incentive to engage in the vigorous monitoring of corporate performance and investor activism that could address shortfalls in such performance. As a consequence, such large institutional investors—not to mention the large and growing body of indexers like Vanguard and BlackRock—are likely to appear “rationally apathetic” about corporate governance. But, as the authors also point out, there is a solution to this agency conflict—and to the corporate governance “vacuum” that has been said to result from the alleged apathy of well‐diversified (and indexed) institutional investors: the emergence of shareholder activists. The activist hedge funds and other specialized activists who have come on the scene during the last 15 or 20 years are now playing an important role in supporting this relatively new ownership structure. Instead of taking control positions, the activists “tee‐up” strategic business and financing choices that are then decided upon by the vote of institutional shareholders that are best characterized not as apathetic, but as rationally “reticent”; that is, they allow the activists, if not to do their talking for them, then to serve as a catalyst for the expression of institutional shareholder voice. The institutions are by no means rubber stamps for activists' proposals; in some cases voting for the activists' proposals, in many cases against them, the institutions function as the long‐term arbiters of whether such proposals should and will go forward. In the closing section of the article, the authors discuss a number of recent legal decisions that appear to recognize this relatively new role played by activists and the institutions that choose to support them (or not)—legal decisions that appear to confirm investors' competence and right to be entrusted with such authority over corporate decision‐making.     

The Real Options Component and Market Value of Taiwan Technological Companies

Real options valuation has been applied in real investment extensively. However the empirical researches of real options components’ value are seldom studied. This study uses the panel data model to test whether the stock prices of Taiwan listed companies reflect investor’s expectations regarding the value of real options. This article demonstrates that investors cannot ignore the real options components when evaluating stock market value. The results also confirm that the proportion of a firm’s market value not due to assets-in-place is significantly and positively related to the variables of stock beta, skewness of stock returns, size, capital stock, and research and development. In addition, firms with lower firm life cycle have a higher real options value.     

Biomarker of Quality? Venture‐backed Biotech IPOs and Insider Participation

Corporate financial managers of biotech firms need long‐term financing to reach key milestones, and that requires a long‐ term capital structure. They must balance a mix of investors with different objectives and different investment horizons that includes traditional venture capitalists and also hedge funds and mutual funds. This study helps practitioners understand the complex role of exit decisions, as venture capitalists seek better exit strategies and performance. IPOs are financing but not “exit” moves. In addition to certifying firm value, insider purchasing of shares in the IPO offering has two major consequences. First, venture capitalists reallocate large sums of capital from early‐stage to late‐stage deals that are expected to have lower risk (but also lower expected return) and shorter time to exit. Second, the speed at which VCs exit after the IPO depends on the firm ownership structure after the IPO and the stock liquidity. Going public with a significant participation by venture capitalists will probably increase the post‐IPO ownership and decrease the free float of the stock, implying a delay of the exit and the realization of the capital gains from the investments. Although this study has focused exclusively on the biotechnology industry, insider participation is not unique to it. Biotech's venture brethren in the software and technology industries also have insider participation in IPOs. During 2003–2015, approximately 41 venture‐backed firms outside of the biotechnology sector had insider participation.     

The value of ongoing venture capital investment to newly listed firms

We examine whether the market values continuing venture capital (VC) investor involvement in firms post-IPO. Compared to the US, Australian VC investors exit their investments post-IPO by on-market sales rather than distribution of holdings to their investors. Lockup periods tend to be longer and ownership thresholds for reporting trades lower. We find that the market responds positively to buy transactions, negatively to sell transactions of VC investors and negatively to the resignation of VC directors. These results are consistent with VC investors in the firm having a positive influence and creating value from which the VCs and other shareholders benefit.