Institutional investors and bank governance: An international analysis of bank earnings management

Despite the growing importance of institutional investors in global capital markets and the link between bank earnings management and financial crash risk, little is known about the role of institutional investors in mitigating bank earnings management. We conduct the first international analysis of this issue using a broad sample of banks and institutional investors. We find a negative relation between institutional ownership and bank earnings management, after controlling for the stringency of a country's bank regulations and other relevant bank and country characteristics. Additionally, institutional ownership is more negatively related to earnings management in countries with more-stringent bank disclosure requirements or when ownership is held by domestic rather than foreign institutional investors. Institutional ownership is also more negatively related to earnings management in countries in which insiders extract more private benefits or when ownership is held by institutional blockholders. Our findings have important policy implications regarding institutional investors' engagement with banks.     

Institutional investor’ proportions and inactive trading

We focus on a typical market anomaly-inactive trading: trading volume shrinks while stock price abnormally jumps. We calibrate a theoretical model with variance ambiguity heterogeneous among investors and illustrate that ambiguity averse investors' proportions enhance trading volume shrinkage and abnormal price jumps. We provide a cross-section analysis of stocks' inactive trading by introducing institutional investors' proportions to measure investor structures' differences among stocks. We also empirically measure relative inactive trading for constituent stocks in S&P 500 from 2014 to 2019 and demonstrate that institutional investors' proportion is negatively related to inactive trading. Finally, we demonstrate that higher proportions of institutional investors lead to less inactive trading anomalies.     

Stakeholder relations and stock returns: On errors in investors' expectations and learning

A significant number of institutional investors publicly state the belief that corporate stakeholder relations are associated with firm value in a manner that the financial market fails to understand. We investigate whether stakeholder information predicted risk-adjusted returns due to errors in investors' expectations and ultimately ceased to do so as attention for such information increased. We build a stakeholder-relations index (SI) for a wide range of U.S. firms over the period 1992–2009 and provide evidence that the SI explained errors in investors' expectations about firms' future earnings. The SI was positively associated with long-term risk-adjusted returns, earnings announcement returns, and errors in analysts' earnings forecasts over the period 1992–2004. However, as attention for stakeholder issues became more widespread, subsequently, these relationships diminished considerably. The results are consistent with the idea that increased investor attention for stakeholder issues eventually eliminates mispricing.     

Economic policy uncertainty,investor attention and post-earnings announcement drift

How the market incorporates information into stock price is a core issue in finance. This study focuses on the impact of economic policy uncertainty (EPU) on the stock prices information efficiency of China's A-share market and underlying role of investors' attention allocation mechanism. This study analyzes the information efficiency of stock prices using the sensitivity of stock cumulative abnormal return to earnings information across different windows following earnings announcement. Based on the earnings announcement events of listed companies in China's A-share market, this study presents an empirical study of the aforementioned issues using event study and regression analysis methods. The following results are seen: (1) EPU aggravates the underreaction of stock price earnings information and the post-earnings announcement drift in the A-share market. (2) Under highly uncertain economic policies, investors show a limited attention allocation pattern of devoting increasing attention to macroeconomic policies and decreasing attention to earnings information, which leads to a decrease in the information efficiency of stock price. This study also analyzes the heterogeneity of the influence of EPU on stock price information efficiency using the institutional shareholding ratio. The results show that increasing institutional shareholding does not reduce the adverse effects of EPU on the information efficiency of stock prices. This study not only provides empirical evidence for Brunnermeier, Sockin, and Xiong (2022) and rational inattention theory, but also reveals that institutional investors show similar behavioral characteristics to retail investors in China's stock market. The results of this study have policy significance for improving the information efficiency of stock market.     

EARNINGS CONFERENCE CALLS AND INSTITUTIONAL MONITORING: EVIDENCE FROM TEXTUAL ANALYSIS

We document the effects of institutional investors on the qualitative information disclosure of firms during earnings conference calls. Using conference call and institutional ownership data between 2005 and 2016, we find that aggregate institutional ownership dampens conference call tone. The effects of institutional investors on tone are causal based on results from indexed firms. Consistent with hypotheses regarding investors' horizons, short-term institutional investors are associated with a more positive conference call tone, as well as more opportunistic trading, whereas long-term investors are associated with a more negative tone. Market participants can generally disentangle the impact of institutional investors on tone based on investor type.     

On the association between institutional ownership and aggressive corporate earnings management in Australia

This study examines the association between institutional ownership and Australian firms' aggressive earnings management strategies. In contrast to similar studies, this study does not assume that the two views on how institutional ownership associates with firms' earnings management behaviour are mutually exclusive. The association between institutional ownership and firms' income increasing discretionary accruals is expected to vary as the level of institutional ownership increases. The results support the predicted non-linear association between institutional ownership and income increasing discretionary accruals. In particular, a positive association is found at the lower institutional ownership levels, consistent with the view that transient (short-term oriented) institutional investors create incentives for managers to manage earnings upwards. On the other hand, a negative association is found at the higher institutional ownership levels, consistent with the view that long-term oriented institutional investors' monitoring limits managerial accruals discretion. These findings suggest that institutional investors can act as a complementary corporate governance mechanism in mitigating myopic aggressive earnings management by corporations when they have a sufficiently high ownership level.     

Dividend Changes and the Persistence of Past Earnings Changes

We examine whether the market interprets changes in dividends as a signal about the persistence of past earnings changes. Prior to observing this signal, investors may believe that past earnings changes are not necessarily indicative of future earnings levels. We empirically investigate whether a change in dividends alters investors' assessments about the valuation implications of past earnings. Results confirm the hypothesis that changes in dividends cause investors to revise their expectations about the persistence of past earnings changes. This effect varies predictably with the magnitude of the dividend change and the sign of the past earnings change.     

Institutional investor distraction and earnings management

In this study, we explore the implications of institutional investor distraction for earnings management. Our identification approach relies on a firm-level measure of institutional investor distraction that exploits exogenous attention-grabbing shocks to unrelated parts of institutional investors' portfolios. We find that firms with distracted institutional shareholders engage more in both accrual-based and real earnings management. Further analyses show that the association between investor distraction and earnings management is stronger in firms with low analyst coverage and weak board monitoring, as well as in firms where managing earnings upward allows meeting or just beating their earnings target. Collectively, our results suggest that managers exploit the loosening in monitoring intensity resulting from investor distraction by engaging in earnings management. Even in the presence of institutional investors with superior monitoring abilities, limited attention may induce insufficient monitoring of earnings management practices.     

News release and the role of different types of investors

We examine how investors react to positive and negative news in the Chinese stock market. We show that positive news is followed by a reversal in stock price, while negative news reports are accompanied by a drift. Using a unique account-level dataset, we find that institutional investors' attention bias contributes to the market's absorption process for different types of news, which is different from the conclusion that the phenomenon is driven by retail investors in the U.S. market. We explain the differences between the two markets as the short-sale constraints induce the attention bias of institutional investors in China. Individual investors are not able to correctly judge the content of news reports, and act as a liquidity provider. We highlight the market regulation plays an important role in the process of investors analyzing information.     

In name only: Information spillovers among Chinese firms with similar stock names during earnings announcements

We examine whether investors' attention on salient firm characteristics affects information spillovers during corporate earnings announcements. For market participants in China, the stock name is a salient feature of listed companies. We find that the market reaction of non-announcing firms to earnings reports of announcing firms is greater across firms with similar stock names. The incremental information spillovers among similarly named stocks are stronger for larger announcing firms and on days with fewer earnings announcements. The incremental information spillovers between similarly named stocks do not fully reverse in the post-announcement period, consistent with persistent investor behavior predicted by the salience theory. There are also significant return comovements among similarly named stocks. Our findings suggest that investors with limited attention are likely to focus on salient stock names and overestimate the economic connections between similarly name stocks. Our study extends the behavioral finance literature by showing how investors' attention on salient firm features can bias their reaction to unrelated peer disclosures.     

Mutual funds' capital gains lock-in and earnings management

Capital gains taxation creates a lock-in effect, increasing investors' incentives to monitor and decreasing portfolio firms' incentives to cater to short-term investors. We show a negative relation between lock-in and portfolio firms' earnings management, and this relation is stronger for capital gains held by tax-sensitive investors. Further, the relation between lock-in and earnings management is stronger when the capital gains tax rate is higher. We show that locked-in funds vote against management and against audit committee members' reappointment following earnings management. Locked-in funds are less likely to exit a position following disappointing earnings announcements, reducing firms' incentive to manage earnings.     

Do Weather‐Induced Moods Affect the Processing of Earnings News?

We investigate whether unpleasant environmental conditions affect stock market participants’ responses to information events. We draw from psychology research to develop a new prediction that weather‐induced negative moods reduce market participants’ activity levels. Exploiting geographic variation in equity analysts’ locations, we find compelling evidence that analysts experiencing unpleasant weather are slower or less likely to respond to an earnings announcement relative to analysts responding to the same announcement but experiencing pleasant weather. Price association tests find evidence consistent with reduced activity due to weather‐induced moods delaying equilibrium price adjustments following earnings announcements. We also use our analyst‐based research design to re‐examine an existing prediction that unpleasant weather induces investor pessimism, and find evidence of both analyst pessimism and reduced activity in the presence of unpleasant weather. Together, our study provides new evidence that both extends and reaffirms findings of a relation between unpleasant weather and market activities, and contributes to the broader psychology and economics literature on the impact of weather‐induced mood on labor productivity.     

Expected Mispricing: The Joint Influence of Accounting Transparency and Investor Base

We examine how accounting transparency and investor base jointly affect financial analysts' expectations of mispricing (i.e., expectations of stock price deviations from fundamental value). Within a range of transparency, these two factors interactively amplify analysts' expectations of mispricing—analysts expect a larger positive deviation when a firm's disclosures more transparently reveal income‐increasing earnings management and the firm's most important investors are described as transient institutional investors with a shorter‐term horizon (low concentration in holdings, high portfolio turnover, and frequent momentum trading) rather than dedicated institutional investors with a longer‐term horizon (high concentration in holdings, low portfolio turnover, and little momentum trading). Results are consistent with analysts anticipating that transient institutional investors are more likely than dedicated institutional investors to adjust their trading strategies for near‐term factors affecting stock mispricings. Our theory and findings extend the accounting disclosure literature by identifying a boundary condition to the common supposition that disclosure transparency necessarily mitigates expected mispricing, and by providing evidence that analysts' pricing judgments are influenced by their anticipation of different investors' reactions to firm disclosures.     

Institutional investors: Arbitrageurs or rational trend chasers

This paper studies the relationship between institutional investor holdings and stock misvaluation in the U.S. between 1980 and 2010. I find that institutional investors overweigh overvalued and underweigh undervalued stocks in their portfolio, taking the market portfolio as a benchmark. Cross-sectionally, institutional investors hold more overvalued stocks than undervalued stocks. The time-series studies also show that institutional ownership of overvalued portfolios increases as the portfolios' degree of overvaluation. As an investment strategy, institutional investors' ride of stock misvaluation is neither driven by the fund flows from individual investors into institutions, nor industry-specific. Consistent with the agency problem explanation, investment companies and independent investment advisors have a higher tendency to ride stock misvaluation than other institutions. There is weak evidence that institutional investors make a profit by riding stock misvaluation. My findings challenge the models that view individual investors as noise traders and disregard the role of institutional investors in stock market misvaluation.     

Temperature and trading behaviours

It is well known that the weather has an impact on human behaviours. Motivated by the extant literature concerning the positive linear relationship between temperature and investors' trading based on regional data (e.g., Schmittmann et al., 2015), we re-examine the temperature effect by utilizing a dataset that encompasses a large number of individual investors' accounts and a wider range of weather conditions, and construct a comprehensive measure of sensed temperature, Apparent Temperature, which incorporates atmospheric temperature, relative humidity and wind velocity. Our results demonstrate that the relationship between Apparent Temperature and individual investors' purchasing tendency displays an inverted U-shape. At a comfortable temperature, investors are more aggressive and tend to buy more stocks relative to selling. However, the relationship between Apparent Temperature and trading volumes displays a U-shape, suggesting that investors trade less on days when the temperature is comfortable, reducing non-financial opportunity costs. Further, Apparent Temperature displays greater external validity than the three weather conditions when they are examined individually. Our study provides original evidence of non-linearity, instead of the linearity documented by previous research, in the relationships between temperature and retail investors' trading behaviours. Our findings contribute to the literature regarding the weather-induced sentiment misattribution of a diversity of investors.     

Dividend or growth funds: What drives individual investors' choices?

We study dividend fund buying behavior using over 80,000 individual Chinese mutual fund investors from a private Chinese mutual fund account dataset. Based on a variety of specifications and logistic regressions, we empirically investigate investors' characteristics in choosing dividend-paying and/or growth mutual funds under different market scenarios. To the best of our knowledge, this research represents an initial attempt to study individual dividend investors in mutual fund markets. We find that older Chinese investors prefer dividend-paying funds less than growth funds, but this depends on different market conditions, and the age effect shows a nonlinear mode when considering age grouping. Moreover, investors' prior experience plays a crucial role in choosing the fund type; however, the conclusions vary with market scenarios. In addition, female investors prefer more dividend-paying funds than do male investors, but investing experience counteracts this difference. We also find that geographic location is a contributor when investors decide the fund type.     

The Benefit of Excluding Institutional Investors from Fixed-Price IPOs: Evidence from Taiwan

A simple way to mitigate the winner's curse in initial public offerings (IPOs) is to reduce the number of informed investors in IPO markets. In Taiwan, institutional investors are not permitted to subscribe to fixed-price IPOs. Excluding institutional investors raises uninformed investors' allocation rates. We show that the winner's curse is still present in Taiwan's fixed-price IPO markets even without the participation of institutional investors, but that IPO underpricing is reduced by at least 4 percent due to alleviating the winner's curse, as institutional investors are excluded from the fixed-price offerings.     

The sovereign ceiling and emerging market corporate bond spreads

We use the spreads of emerging market bonds traded in secondary markets to study investors' perception of country risk. Specifically, we ask whether investors apply the “sovereign ceiling,” which says that no firm is more creditworthy than its government. To do this we compare the spreads of bonds issued by firms to those of bonds issued by the firms' home governments. We find several cases where a firm's bond trades at a lower spread than that of the firm's government, indicating that investors do not always apply the sovereign ceiling. Bonds for which this is true tend to have substantial export earnings and/or a close relationship with either a foreign firm or with the home government.     

PRICE PRESSURE AND THE ROLE OF INSTITUTIONAL INVESTORS IN CLOSED-END FUNDS

A trader-identified transactions database is employed to investigate: (1) the relation between order-flow imbalance and closed-end fund share prices and discounts; and (2) the role of institutional investors in closed-end funds. Empirical results are consistent with the hypothesis that buyers (sellers) of closed-end funds face upward-downward-) sloping supply (demand) curves. The results also demonstrate that ownership statistics do not accurately reflect institutional investors' importance in the closed-end fund market. The results fail to provide evidence that institutional investors offset the positions of individual investors or that institutional investors face systematic “noise trader risk.”     

提高盈余透明度能带来资本市场和企业双赢吗？——基于企业投资行为视角

盈余透明度作为企业盈余质量是否有效传递的关键,连接着资本市场与企业。在未来更加市场化的股票发行注册制下,盈余信息直接关系着投资者的判断与决策。盈余透明度的提高减少信息不对称,有利于抑制企业机会主义行为,有效保护投资者权益。但盈余透明度提高在有利于资本市场发展的同时,能否给企业自身发展带来好处呢？本文以我国2009-2018年A股上市公司为样本,探究盈余透明度与企业投资行为的关系,找出盈余透明度对企业投资效率的正向影响,证明提高企业盈余透明度是一种双赢的行为,既是机会主义行为防治的有效手段,优化资本市场环境,又是企业健康发展的有力助推因素。