Information asymmetry,mutual funds and earnings management: Evidence from China

This paper investigates how information asymmetry and mutual fund ownership affect listed companies’ earnings management. We show that (1) reducing information asymmetry improves firms’ earnings management behavior; (2) relative to short-term mutual funds, long-term mutual funds promote earnings quality by adopting a monitoring role; and (3) by dividing firms into high/low information asymmetry groups, we find that the information environment significantly increases the effect of long-term mutual funds on firms’ earnings management. In this paper, we provide new evidence for the role that institutional investors play in a typical emerging capital market. Our results have clear policy implications: to increase earnings quality, it is essential to improve information transparency and develop long-term institutional investors.     

An Empirical Investigation of Herding Behavior in the U.S. REIT Market

Our study investigates the market-wide herding behavior in the U.S. equity REIT market. Utilizing the quantile regression method, we find that herding is more likely to be present in the high quantiles of the REIT return dispersion. This implies that REIT investors tend to herd under turbulent market conditions. Our results also support the asymmetry of herding behaviors, that is, herding is more likely to occur and becomes stronger in declining markets than in rising markets. In addition, our findings show that the current financial crisis has caused a change in the circumstances under which herding can occur, as we find that during the current crisis REIT investors may not start to herd until the market becomes extremely turbulent whereas during the relatively normal period before the crisis, investors tend to herd when the market is moderately turbulent. Finally, we find that compared with the case of the ‘pre-modern’ era, REIT investors are more likely to herd in the ‘modern’ era, during which herding usually occurs when the market becomes tumultuous. This implies that the switch of REITs from passive externally managed entities into active self-managed ones has made the investors more responsive to market sentiment.     

Institutional Investor Trading in a Short Investment Horizon: Evidence from the Korean Stock Market

We examine the weekly trading activities of institutional investors in the Korean stock market. First, we find that average net trades by institutional investors this week are negatively related to one-week lagged returns, suggesting that they could be contrarian traders. Second, our finding shows that institutional investors’ net trades this week are positively related to the net trades next week, consistent with persistent trading and/or herding behavior. Third, we find that institutional net trades are positively related to the post one-week returns. Finally, our findings are most pronounced in the group of short-term institutional investors.     

Local institutional investors,information asymmetries,and equity returns

We examine the informational role of geographically proximate institutions in stock markets. We find that both the level of and change in local institutional ownership predict future stock returns, particularly for firms with high information asymmetry; in contrast, such predictive abilities are relatively weak for nonlocal institutional ownership. The local advantage is especially evident for local investment advisors, high local ownership institutions, and high local turnover institutions. We also find that the stocks that local institutional investors hold (trade) earn higher excess returns around future earnings announcements than those that nonlocal institutional investors hold (trade).     

Corporate social responsibility performance and information asymmetry

Using Corporate Social Responsibility (CSR) performance scores from KLD STAT, we investigate whether CSR performance affects information asymmetry. We find that both positive and negative CSR performance reduce information asymmetry. Moreover, we find that the influence of negative CSR performance is much stronger than that of positive CSR performance in reducing information asymmetry. We also investigate the effect of informed investors on the CSR performance-asymmetry relation. We find that the negative association between CSR performance and bid-ask spread decreases for firms with a high level of institutional investors compared to those with a low level of institutional investors. This finding suggests that informed investors may exploit their CSR information advantage. Overall, our results suggest that CSR performance plays a positive role for investors by reducing information asymmetry and that regulatory action may be appropriate to mitigate the adverse selection problem faced by less-informed investors.     

Insider Trading and Corporate Information Transparency

Our study examines the relation between insider trading and corporate information transparency. We find a negative relation between firms’ information transparency and the economic significance of insider trading, including the amount of insider purchase and sale and the profitability of insider transactions. We also find a negative relation between information transparency and stock price reaction to news of insider trading, which suggests that increases in information transparency preempt insiders’ private information. Our study provides evidence consistent with firms’ transparency-enhancing activities decreasing information asymmetry between insiders and investors by revealing insiders’ private information to investors in a timely manner.     

Institutional ownership and commonality in liquidity

We investigate the relation between institutional ownership and commonality in liquidity and whether this relation differs across country-level institutional and information environments. Using a comprehensive dataset for firms across 40 countries for the period between 2000 and 2016, we find that institutional ownership is negatively associated with stock liquidity commonality. In addition, a firm’s information environment plays the moderating role in the relation between institutional ownership and commonality in stock liquidity. Importantly, we document that the negative association between institutional ownership and liquidity commonality is stronger for firms in countries with weak institutional characteristics or less transparent information environments. Our findings provide additional insights into the role of institutional investors as a demand-side factor of liquidity commonality in international financial markets.     

An empirical analysis of herd behavior in global stock markets

This paper examines herding behavior in global markets. By applying daily data for 18 countries from May 25, 1988, through April 24, 2009, we find evidence of herding in advanced stock markets (except the US) and in Asian markets. No evidence of herding is found in Latin American markets. Evidence suggests that stock return dispersions in the US play a significant role in explaining the non-US market’s herding activity. With the exceptions of the US and Latin American markets, herding is present in both up and down markets, although herding asymmetry is more profound in Asian markets during rising markets. Evidence suggests that crisis triggers herding activity in the crisis country of origin and then produces a contagion effect, which spreads the crisis to neighboring countries. During crisis periods, we find supportive evidence for herding formation in the US and Latin American markets.     

Herding and the role of foreign institutions in emerging equity markets

This study examines herding surrounding qualified foreign institutional investors (QFIIs) in an emerging equity market. Using five years of weekly order flow data, I find that, when QFIIs increase (decrease) their weightings in particular sectors, dealers', margin traders', and mutual funds' holdings/weightings likewise increase (decrease) during the same and following weeks, despite controls for return and trading momentum. This herding is potentially destabilizing as prices overshoot and mean revert highlighting the potential negative impact of this level of transparency and of the policy of disclosing QFII trading in emerging markets.     

Did institutions herd during the internet bubble?

We examine the trading behavior of institutional investors during the internet bubble and crash of 1998–2001, and its impact on stock prices. Similar to some recent findings concerning the trading behavior of hedge funds and NASDAQ 100 stocks, we find that during the bubble all types of institutions herded with great intensity into internet stocks for a comprehensive sample of institutional investors and internet stocks. In addition to this, we present three entirely new results. First, institutional herding was much greater than what can be explained by momentum trading. Second, institutions as a group continued to increase their holdings of internet stocks for two quarters past the market peak during the first quarter of 2000, and three quarters past the peak for individual stock prices, suggesting that institutions were unable to time the price peaks. Finally and most importantly, we find positive abnormal returns contemporaneous with institutional herding and negative abnormal returns (reversals) at the point that herding ceased. This finding suggests that institutions’ trading created temporary price pressures, and may have contributed to the bubble.     

THE BROKERAGE FIRM EFFECT IN HERDING: EVIDENCE FROM INDONESIA

We examine herding behavior of domestic and foreign investors in the Indonesian stock market. We document that both domestic and foreign investors from a particular brokerage firm tend to herd. The foreign investors exhibit a greater propensity to herd than domestic investors. However, when examining investor trading across brokerage firms, we find only weak evidence of herding by domestic investors and no herding by foreign investors. Our overall findings suggest a strong brokerage firm effect on herding but a weak marketwide effect. Moreover, we find evidence that the strong brokerage effect on herding is likely driven by acting on common information.     

Institutional herding and its price impact: Evidence from the corporate bond market

We examine the extent to which institutional investors herd in the U.S. corporate bond market and the price impact of their herding behavior. We find that the level of institutional herding in corporate bonds is substantially higher than what is documented for equities, and that sell herding is much stronger and more persistent than buy herding. The price impact of herding is also highly asymmetric. While buy herding facilitates price discovery, sell herding causes transitory yet large price distortions. Such price destabilizing effect of sell herding is particularly pronounced for speculative-grade, small, and illiquid bonds, and during the financial crisis.     

News‐Specific Price Discovery in Credit Default Swap Markets

We examine the lead and lag relation between equity and credit default swap (CDS) markets. We find that price discovery in equity markets only leads CDS markets following aggregate positive news and not so following other news. While difficult to reconcile with standard asset pricing theories, asymmetric price adjustment is common in goods markets, arising from intermediary power. We provide an explanation for this asymmetry based on dealers exploiting informational advantages vis‐à‐vis investors with hedging motives. Consistent with this explanation, we find that the patterns we document are related to firm‐level proxies for hedging demand, as well as economy‐wide measures of information asymmetries.     

短期羊群行为的影响因素与价格效应——基于高频数据的实证检验

通过创新性地使用日内高频交易数据对A股市场中的羊群行为进行研究,本文发现:(1)羊群行为具有短期脆弱性特征,随着度量频率的提高,羊群行为的程度严格递增。(2)信息不对称程度、机构投资者比例、股票规模等因素,会显著影响短期羊群行为程度。(3)短期羊群行为会伴随着明显的价格反转:短期买入(卖出)羊群行为后,股票的超额收益显著为负(正),并且短期羊群行为越显著,价格反转的程度越大。(4)价格反转效应存在不对称性:规模越大、交易越活跃的股票,短期买入羊群行为的价格反转越明显,而短期卖出羊群行为的价格反转越不明显。     

Herding and Feedback Trading by Institutional and Individual Investors

We document strong positive correlation between changes in institutional ownership and returns measured over the same period. The result suggests that either institutional investors positive-feedback trade more than individual investors or institutional herding impacts prices more than herding by individual investors. We find evidence that both factors play a role in explaining the relation. We find no evidence, however, of return mean-reversion in the year following large changes in institutional ownership—stocks institutional investors purchase subsequently outperform those they sell. Moreover, institutional herding is positively correlated with lag returns and appears to be related to stock return momentum.     

Portfolio concentration and performance of institutional investors worldwide

Using data on security holdings for 10,771 institutional investors from 72 countries, we test whether concentrated investment strategies result in excess risk-adjusted returns. We examine several measures of portfolio concentration with respect to countries and industries and find that portfolio concentration is directly related to risk-adjusted returns for institutional investors worldwide. Results suggest, in contrast to traditional asset pricing theory and in support of information advantage theory, that concentrated investment strategies in international markets can be optimal.     

Institutional ownership changes and returns around analysts’ earnings forecast release events: Evidence from Taiwan

Traditional data sources do not have institutional holding data on a daily basis. Because of this, most prior empirical studies of institutional herding have focused on quarterly or annual data. The problem, however, with using quarterly or annual data on institutional holdings is that these data may not reveal institutional herding if it occurs over a shorter time interval. For this study, we make use of data from the Taiwan Stock Exchange (TSE). Unlike traditional data sources, the TSE provides daily institutional holdings information. The use of this detailed data allows us to make more interesting analysis and inferences. In this study, we examine the relationship between institutional ownership changes and returns localized around analysts’ earnings forecast release events. Analysis of institutional ownership and return data around the earnings release event allows us to investigate institutional herding and feedback behavior in a different level. Our major results are as follows: (1) there exists a relation between company specific attributes and institutional herding, (2) observed changes in institutional ownership and contemporaneous return are mainly the results of inter-day price impact of herding, (3) institutional investors show evidence of being informed traders in buying but not selling.     

The effects of firms’ information environment on analysts’ herding behavior

We find financial analysts herd to a greater degree in firms with more opaque information environments as measured by the incidence of short-term institutional investors present. The S-statistic, a measure of forecast bias, and forecast timing and quality metrics are used to measure analyst herding behavior. The results are consistent with the notion that opaque information environments are more conducive to analysts engaging in reputational herding behavior where more capable analysts act first and less capable analysts follow. Additionally, analysts are more likely to issue forecast revisions subsequent to management earnings guidance in less opaque environments. Robustness tests indicate our operational measure of opacity is not subsumed by other measures of the information environment, namely information asymmetry.     

Daily Stock Trading by Investor Type and Information Asymmetry: Evidence from the Korean Market

We examine the influence of trading by heterogeneous investors on information asymmetry in the Korean stock market, which includes domestic and foreign institutional investors and individual investors. In particular, we examine the relationship between the daily trading volume and the level of information asymmetry reflected in the stock price. The results reveal that high-volume daily trading by domestic institutional and individual investors increases the degree of information asymmetry in the short term, but is more evident for individual investors. Foreign institutional investors tend to mitigate the information asymmetry. Finally, our findings are robust to an alternative measure of investor trading.     

Dynamic herding analysis in a frontier market

We use constant coefficient and time-varying parameter approaches to examine herding in the context of a frontier market. Our sample comprises of all companies listed on the Trinidad and Tobago Stock Exchange from January 2001 to December 2014. We find significant evidence of herding across the market, which is more prominent for smaller stocks. Microstructures, including liquidity and volatility, intensify herd behavior, except for larger firms. Additional analyses show that herding is present in both up and down markets, but is stronger during rising markets. The time-varying analysis, based on a state-space Kalman filter, further establishes that herding, though quite prevalent, is not a static feature of the market but evolves throughout the sample period. Specifically, it oscillates between greater herding to anti-herd behavior, as investors identify themselves with crises and better information access respectively.