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.     

Beyond Financial Reporting An Integrated Approach to Disclosure

A company's market value is a key determinant of its future success, affecting its ability to raise capital, recruit and retain key employees, and make strategic acquisitions. Confident, well‐informed investors are necessary for achieving and maintaining accurate valuation of a company's stock. But standard disclosure practice has left many companies releasing a great deal of data while conveying only limited understanding to outsiders. This article presents the outline of an integrated approach to corporate disclosure in which each of the three major elements–required financial reports, supplemental disclosure, and interactions with investors and intermediaries–are consistent and mutually reinforcing. Such an approach begins with required reports that refiect as closely as possible the economic reality of a company's business. But if GAAP income statements and balance sheets are often useful for communicating current and past performance, they are not designed to convey management's strategic vision and the company's prospects for creating value. To achieve and maintain accurate valuation, management must supplement mandated financial reporting with voluntary communication that highlights value drivers and helps investors understand both the company's strategic goals and management's progress in meeting those goals. Finally, management must interact with investors and capital market intermediaries in ways that provide them with a clear and compelling picture of the company's prospects, which should help both analysts and institutional investors become more effective monitors of the firm's performance. Through consistent communication that goes well beyond the sell side's focus on quarterly earnings per share, management will discover that it has the power to set the agenda for how the company's performance is evaluated by the market. In the process, companies are also likely to find that their investors (and analysts) are more patient than they thought, while their operating managers feel less pressure to take shortsighted steps to boost EPS. Both of these expected benefits of an integrated disclosure policy should end up increasing a company's value.     

Examining the effect of deception detection decision aids on investors' perceptions of disclosure credibility and willingness to invest

Recent evidence suggests that the trend of issuing video disclosures is growing and investors are exposed to the risk of including deceptive information in their decisions. This study suggests that investors can use deception detection decision aids to identify deceptive behavior in video disclosures, and that the use of such decision aids affects their perceptions of disclosure credibility and willingness to invest. The theoretical framework of this study suggests that providing investors with a deception detection decision aid affects their willingness to invest through their perceptions of disclosure credibility, and that this effect is conditional on management's reputation. Using data from 387 nonprofessional investors, the findings provide support for the predicted effect of deception detection decision aid on investors' judgment and decision making. The effect of providing investors with a deception detection decision aid is fully mediated by investors' perceptions of disclosure credibility, and that effect is significantly stronger when management's reputation is good than when management's reputation is bad.     

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.     

Identifying and Attracting the "right" Investors: Evidence on the Behavior of Institutional Investors

This article summarizes the findings of research the author has conducted over the past seven years that aims to answer a number of questions about institutional investors: Are there significant differences among institutional investors in time horizon and other trading practices that would enable such investors to be classified into types on the basis of their observable behavior? Assuming the answer to the first is yes, do corporate managers respond differently to the pressures created by different types of investors– and, by implication, are certain kinds of investors more desirable from corporate management's point of view? What kinds of companies tend to attract each type of investor, and how does a company's disclosure policy affect that process? The author's approach identifies three categories of institutional investors: (1) “transient” institutions, which exhibit high portfolio turnover and own small stakes in portfolio companies; (2) “dedicated” holders, which provide stable ownership and take large positions in individual firms; and (3) “quasi‐indexers,” which also trade infrequently but own small stakes (similar to an index strategy). As might be expected, the disproportionate presence of transient institutions in a company's investor base appears to intensify pressure for short‐term performance while also resulting in excess volatility in the stock price. Also not surprising, transient investors are attracted to companies with investor relations activities geared toward forward‐looking information and “news events,” like management earnings forecasts, that constitute trading opportunities for such investors. By contrast, quasi‐indexers and dedicated institutions are largely insensitive to shortterm performance and their presence is associated with lower stock price volatility. The research also suggests that companies that focus their disclosure activities on historical information as opposed to earnings forecasts tend to attract quasi‐indexers instead of transient investors. In sum, the author's research suggests that changes in disclosure practices have the potential to shift the composition of a firm's investor base away from transient investors and toward more patient capital. By removing some of the external pressures for short‐term performance, such a shift could encourage managers to establish a culture based on long‐run value maximization.     

Asymmetric Information and Risky Debt Maturity Choice

When capital market investors and firm insiders possess the same information about a company's prospects, its liabilities will be priced in a way that makes the firm indifferent to the composition of its financial liabilities (at least under certain, well-known circumstances). However, if firm insiders are systematically better informed than outside investors, they will choose to issue those types of securities that the market appears to overvalue most. Knowing this, rational investors will try to infer the insiders' information from the firm's financial structure. This paper evaluates the extent to which a firm's choice of risky debt maturity can signal insiders' information about firm quality. If financial market transactions are costless, a firm's financial structure cannot provide a valid signal. With positive transaction costs, however, high-quality firms can sometimes effectively signal their true quality to the market. The existence of a signalling equilibrium is shown to depend on the (exogenous) distribution of firms' quality and the magnitude of underwriting costs for corporate debt.     

Disagreement and the Cost of Capital

We assess how forms of disagreement among investors affect a firm's cost of capital. Firms experience a lower cost of capital if investors perceive that other investors are ignoring relevant disclosures (perceived errors of omission), but a higher cost of capital if investors perceive that others are responding to irrelevant disclosures (perceived errors of commission). The impact of these two sources of disagreement on the cost of capital is determined by the distribution of opinion and the nature of disclosure. For example, even though aggregated disclosures reveal less to investors, aggregated disclosures may decrease the cost of capital by eliminating disagreement associated with perceived errors of commission. These and additional results arise because the cost of capital is driven not only by investors’ uncertainty about the firm's future earnings performance, but also by investors’ uncertainty about the evolution of beliefs, which partly determines the path of prices.     

Investor response to Morningstar's ratings,category information,and alpha in the Japanese mutual fund market

Mutual fund investors evaluate fund managers' skills before making investment decisions. Previous studies worldwide examined the rationale behind retail investors' investment decisions and found that investors reward performance by net fund flow. A Japanese study found that investors respond to alpha but do not risk factor-related returns. Surprisingly, the result would mean that Japanese investors are more sophisticated than US investors because the literature reported that US investors respond to factor-related returns without distinguishing them from alpha. We explore the background of this result in the Japanese market. This study focuses on the effects of Morningstar's fund ratings, its categories, and salient gross returns, which are readily available to investors unlike alpha. We find the following results: (1) Morningstar's rating does not substitute alpha, indicating that our result differs from the US results. (2) Investors respond only to high category excess returns, but it is a unique effect different from alpha. (3) Salient gross returns do not have a concrete relation with alpha. Moreover, we find solid convex relationships between alpha and fund flows. Investors' responses are limited to a few extreme flows; other than these, they do not respond to alpha. This extreme flow can explain the reactions to alpha on average reported in previous studies. In addition, we find that the category excess return has similar features. The solid convexity reveals that the Japanese mutual fund market is far from sophisticated, consistent with the literature. These results reveal the importance of fund distributors' behavior and information disclosure regulations.     

Meeting new peers: The effects of Morningstar category reassignment on fund flows and star ratings

We investigate how the reassignment of a fund's Morningstar category affects fund flow and Morningstar star rating. We find that funds assigned to a different category gain positive abnormal flows and this effect is significant mainly for high-rated funds. Category reassignment does not improve a fund's star rating on average, and flows are less responsive to a star-rating change if the rating change is likely to be driven by category reassignment. The positive abnormal flows captured by high-rated funds after category reassignment are consistent with a visibility story: some investors filter funds by Morningstar category and star rating, and category reassignment makes a fund more visible to a new group of investors if the fund is highly rated. In contrast, a low-rated fund is likely to be selected only by investors who do not refer to the fund's Morningstar information and, hence, gains little visibility from category reassignment. We also find evidence that more sophisticated investors are more likely to consider not only fund rating but also fund category when evaluating fund performance.     

INVESTOR TAX-TRADING OPPORTUNITIES AND DISCOUNTS ON CLOSED-END MUTUAL FUNDS

Discounts on closed-end mutual funds are a puzzle to financial economists, because arbitrage activities should eliminate discounts in a perfect capital market. In this paper I develop a model that explains discounts, using Merton's option pricing theorem. By holding shares of a closed-end mutual fund, investors lose valuable tax-trading opportunities associated with the constituent securities of the closed-end mutual fund's portfolio. However, investors can take advantage of all tax-trading opportunities by directly holding the closed-end mutual fund's portfolio. I also show that both variances of individual securities and correlations among securities in the portfolio are important factors in determining the magnitude of discounts.     

INTERNATIONAL INVESTORS' EXPOSURE TO RISK IN EMERGING MARKETS

We examine the empirical differences in emerging market betas (β's) taken across four major currencies (U.S. dollar, British sterling, Japanese yen, and German mark) where the β's are either mean-variance or mean-lower partial moment β's. The mean variance β's are found to be statistically similar to lower partial moment β's in most cases, which suggests they are robust to nonnormality in the data. The difference between the two β's has become less significant in recent years as emerging markets have become more stable. Furthermore, evidence is presented that β's obtained from both risk measures and calculated from returns denominated in different currencies have the same ordinal association. This shows the primacy of local risk over foreign exchange risk. We conclude that international investors can continue to use the mean-variance β in assessing risk in emerging markets, although investors should not give it a conventional equilibrium interpretation.     

Informed local trading prior to earnings announcements

Do individual investors have better information about local stocks? Our results demonstrate that they do. Large trading imbalances by investors living close to a firm's headquarters predict the stock's earnings announcement return. Stocks with the most net buying by local investors average significantly higher market-adjusted announcement returns than stocks with the most net selling by local investors. This return difference is pronounced for small and medium-sized firms, but absent among large firms, which have significant analyst coverage. Local investors' information advantage comes at the expense of nonlocal traders.     

Asset allocation and investment horizon

Quarterly recommendations by national brokerage firms since the third quarter of 1989 provide an opportunity to compare different approaches to asset allocation. To follow a brokerage firm's recommendation every quarter is to practice tactical asset allocation. Both the length of the investor's decision horizon and brokerage commissions that are incurred when portfolio changes are made impact investment performance, and both contribute to the risk experienced by investors. Buy-and-hold and strategic asset allocation would have served investors better than tactical asset allocation during the first half of the 1990s.     

Earnings Trend and Performance Relative to Benchmarks: How Consistency Influences Their Joint Use

Archival research shows that the market reacts to earnings trend as well as to earnings performance relative to analysts' forecasts (i.e., benchmark performance). We conduct four experiments to investigate how and why investors react to these two measures when both are available over multiple time periods. Our results show that investors rely on an earnings measure only when it is consistent over time. When both measures are consistent over time, investors use them in an additive fashion, suggesting that they view them as providing different information about the firm. Further tests show that investors believe that earnings trend and benchmark performance both provide information about a firm's future prospects and management's credibility. Although judged future prospects fully explain the effect of earnings trend on investor judgments, neither judged future prospects nor management credibility completely explains the effect of benchmark performance. Our study has implications for firm managers and researchers.     

Institutional monitoring and litigation risk: Evidence from employee disputes

In this article, we investigate how institutional investors help mitigate business‐related risks in a corporate environment. Using a large sample of employment disputes, litigations, and court cases, we find that institutional investors play a significant role in reducing employment litigation. We observe that firms with larger shares of institutional ownership have a lower incidence of employment lawsuits and that long‐term institutional investors are more effective at decreasing employee mistreatment. Our results suggest that institutional investors can improve the employee work environment and help mitigate future employee litigation. The improvement in employee work conditions has been shown to increase a firm's value through increased employee output, reduced litigation, and direct and indirect costs. Our results shed light on the effectiveness of institutional monitoring on a firm's litigation risk.     

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.     

Factors Influencing Corporate Environmental Disclosures

We investigate the effectiveness of the Carbon Disclosure Project (CDP), a not‐for‐profit organization that facilitates environmental disclosures of firms with institutional investors, thereby serving as a corporate governance mechanism for shareholders to influence the firm's environmental disclosures. We examine firm characteristics associated with firms' decisions to disclose carbon‐related information via the CDP for a sample of 319 Canadian firms over a four‐year period. In particular, we examine how firms' decisions to disclose via CDP are associated with shareholder activism, litigation risk, and the opportunity for low‐cost positive publicity once requested by the firms' “signatory” investors. Our results also show that management's decision to release climate change data is associated with domestic, but not foreign, signatory investors. We also find that disclosing firms tend to be those from lower polluting industries with less exposure to litigation risk. This suggests that this new form of coordinated shareholder activism may not be successful at altering the behavior of firms that are heavier polluters.     

Investor Behavior and the Benefits of Direct Stock Ownership

Using an experiment to rule out reverse causality, we examine whether a small investment in a company's stock leads investors to purchase more of the company's products and adopt other views and preferences that benefit the company. We preregister our research methods, hypotheses, and supplemental analyses via the Journal of Accounting Research’s registration‐based editorial process. We find little evidence consistent with these hypotheses for the average investor in our sample using our planned univariate hypothesis tests, and planned Bayesian parameter estimation shows substantial downward belief revision for more optimistic ex ante expectations of the treatment effects. In planned supplemental analyses, however, we do find that the effects of ownership on product purchase behavior and on regulatory preferences are intuitively stronger for certain subgroups of investors—namely, for investors who are most likely to purchase the types of products offered by the company and for investors who are most likely to vote on political matters. The results contribute to our understanding of the benefits of direct stock ownership and are informative to public company managers and directors.     

机构投资者担心企业应用衍生品进行投机吗-来自中国上市公司的证据

以2007-2011年应用过衍生品的中国上市公司为样本,检验机构投资者持股与企业应用衍生品及其投机行为的关系,研究发现:机构投资者担心企业应用衍生品尤其是应用衍生品的投机行为会损害其自身的利益,并且这种担心超出了机构投资者通过积极的监督来保障自身利益的意愿,因此,机构投资者倾向于减少对那些应用衍生品公司的投资,大多维持在一个较低的水平.此外,证据还表明:在我国上市公司中,机构投资者的投资并不普遍,份量也较轻;衍生品在我国上市公司中的应用亦不普遍并且应用的程度很低,大多数应用衍生品的公司是为了套保,但一旦投机则非常严重;机构投资者较为看重应用衍生品公司的成长性,而反感其业绩与盈余管理行为.     

The accuracy of IPO earnings forecasts in Thailand and their relationships with stock market valuation

In order to help reduce information asymmetry between managers and prospective investors, IPO prospectuses in Thailand are required to publish managers' forecasts of the forthcoming year's earnings. This type of direct disclosure is especially important in a developing economy such as Thailand where financial intermediaries and information vendors are relatively sparse, and where investors are rarely professionals. Our results demonstrate that managers' earnings forecasts are much more accurate than extrapolations of historical earnings. We show that forecast accuracy is related to underpricing, and it has a directional, but not statistical, association with one-year stock returns and one-year wealth relatives.