Do institutional investors exacerbate managerial myopia?

This study analyzes corporate expenditures for property, plant and equipment (PP&E), and research and development (R&D) for over 2500 US firms from 1988 to 1994. We find no support for the contention that institutional investors cause corporate managers to behave myopically. Indeed, we document a positive relation between industry-adjusted expenditures for PP&E and R&D and the fraction of shares owned by institutional investors. This relation is robust to a variety of empirical tests, including those that account for endogeneity between institutional ownership and firm-level discretionary expenditures.     

Do foreign institutional investors drive corporate social responsibility? Evidence from listed firms in China

This paper investigates the effect of qualified foreign institutional investors (QFIIs) on corporate social responsibility (CSR) within the context of listed firms in China. We find that QFIIs offer an incisive channel for improving socially responsible practices. In addition, we find that firms with QFIIs are more likely to comply with the Global Reporting Initiative (GRI) guidelines, and that their sustainability reports tend to be longer. We also find that this positive effect is more pronounced in firms with low initial CSR scores than those with high CSR scores at the time when QFIIs enter the sample. Our empirical evidence further confirms that this positive impact is driven by QFIIs from countries with high social awareness, or QFIIs from geographically distant countries, consistent with their motives, and is linked to the ownership of QFIIs, especially when the QFII is among the top ten of the largest shareholders. Finally, our extended analysis reveals that the increase in CSR performance associated with the presence of QFIIs results in greater firm performance and easier access to finance.     

Do facilitation payments affect earnings management? Evidence from China

This study examines whether facilitation payments drive managers to manipulate earnings, thus weakening financial disclosure transparency. I find economically and statistically significant evidence that facilitation payments relate positively to earnings management levels in China. The impact of facilitation payments on earnings management is more pronounced when firms have relatively weak political power, less effective external monitoring, fewer growth options, and when firms are located in regions that have less efficient juridical systems. Finally, the findings are strengthened by a set of additional tests to mitigate the endogeneity problem: a difference-in-differences estimation that exploits China’s anti-corruption campaign as the exogenous shock, a dynamic analysis, an instrumental variable approach, and a Heckman analysis to adjust for selection bias. This study contributes to debates regarding corruption and transparency from a micro-economic perspective.     

Do company visits by institutional investors mitigate managerial myopia in R&D investment? Evidence from China

This study investigates the effects of company visits by institutional investors on managerial myopia about investment in research and development (R&D) in China. We find that company visits increase R&D spending. We also find that this increase is more pronounced for companies that have an entrenched chief executive officer (CEO), as indicated by longer CEO tenure and CEO duality, and for companies that face less intense market competition. The results further show that the increase in R&D spending is more pronounced for companies that have larger institutional ownership, are invested by long-term oriented institutions, are in the high-tech industry, and are state owned. These findings attest to the governance role of institutional investors.     

Do auditors react to real earnings management?

Prior research has documented an association between audit effort and real earnings management [REM]. Specifically, audit report lags have been shown to be positively associated with REM. We investigate the auditor and firm characteristics underlying this association. Our results indicate that overall, REM is associated with longer abnormal audit report lags [ARLs]. We find, however, that this association is driven largely by non-accelerated filers. This result holds for both suspect firms (those firms just meeting earnings benchmarks) and non-suspect firms, for specialist as well as non-specialist auditors, and for profit as well as loss firms. Together our results indicate that when auditors are not constrained by the time pressure of accelerated filing, encountering REM is associated with greater audit effort. Our results may indicate, however, that with respect to accelerated filers, abnormal ARLs may be an imperfect proxy for additional effort. These results have implications for both future research and for the impact of accelerated filing deadlines on audit quality.     

Is conservative reporting attractive to foreign institutional investors? Evidence from an emerging market

This study investigates the relation between conservative reporting and foreign institutional ownership using a unique dataset of firms in Turkey. In doing so, we distinguish between foreign funds and corporations. Contrary to prior findings, our analysis shows that conservative reporting is not necessarily a desirable accounting feature for foreign institutional investors. We also find that the interplay between conservative reporting and ownership is significantly different between foreign funds and corporations. The estimated negative relation holds only for foreign funds. Further analysis reveals that foreign funds do not find conservative reporting desirable in low-asymmetric information firms and reduce ownership with greater accounting conservatism in such firms. The analysis sheds significant lights on the relevance of conservative reporting in alleviating the negative consequences of asymmetric information.     

Do foreign institutional investors destabilize China’s A-share markets?

This paper investigates the effect of foreign institutional investors on the stability of Chinese stock markets. Previous literature views this investor group as destabilizing feedback traders. We use the abolition of ownership restrictions on A shares as a natural experiment. There is strong evidence that foreign institutions have a stabilizing effect on Chinese stock markets and contribute to market efficiency. This finding is robust across exchanges, sample periods, size quintiles and alternative model specifications. By contrast, domestic investors appear to engage in positive feedback trading. Our results have important implications for market regulation.     

Do foreign investors improve stock price informativeness in emerging equity markets? Evidence from Vietnam

Most of previous studies on stock price informativeness tend to focus on the context of mature stock markets while this issue is more acute in emerging equity markets where regulatory and institutional structure are weak. This paper examines the relationship between foreign ownership and stock price informativeness in Vietnam stock market. We utilize a data set covering firm attributes of non-financial firms listed on the Ho Chi Minh City stock exchange over the period 2007–2015. Employing different estimation techniques for panel data, the empirical results indicate that foreign investors improve stock price informativeness in Vietnam stock market. The finding from this paper confirms the important role of foreign investors in emerging equity markets.     

Can media deter management from manipulating earnings? Evidence from China

This study examines the influence of media exposure on managers’ earnings management behavior using China’s publicly traded firms during 2001–2009. We find that firms with more media exposure (both negative and non-negative) manage their earnings less than firms with less media exposure. We also find that “suspect firms” (being specially treated or with refinancing plans like seasoned equity offerings or right offerings) with more media exposure engage in more accrual-based earnings management relative to other firms. These results suggest that Chinese media serve as an external monitor to the majority of firms and place excessive pressure on suspect firms. This paper contributes incrementally to the literature by emphasizing the conflicting role media exposure plays in managerial decisions in earnings management. The findings of this study have practical implications for regulators, auditors, financial analysts, as well as other information intermediaries.     

Does governance travel around the world? Evidence from institutional investors

We examine whether institutional investors affect corporate governance by analyzing portfolio holdings of institutions in companies from 23 countries during the period 2003–2008. We find that firm-level governance is positively associated with international institutional investment. Changes in institutional ownership over time positively affect subsequent changes in firm-level governance, but the opposite is not true. Foreign institutions and institutions from countries with strong shareholder protection play a role in promoting governance improvements outside of the U.S. Institutional investors affect not only which corporate governance mechanisms are in place, but also outcomes. Firms with higher institutional ownership are more likely to terminate poorly performing Chief Executive Officers (CEOs) and exhibit improvements in valuation over time. Our results suggest that international portfolio investment by institutional investors promotes good corporate governance practices around the world.     

Does auditor choice matter to foreign investors? Evidence from foreign mutual funds worldwide

This study explores whether a firm’s auditor choice affects its ability to access foreign equity capital. Using the equity holdings of 35,665 foreign mutual funds from 30 countries for the period 1998–2009, we find evidence that appointing a Big 4 auditor is associated with the increased level of foreign mutual fund ownership in firms. Our results are robust when conditioned on firm-level information asymmetries, country-level information disclosure quality, and when employing the Enron–Andersen fiasco as the natural experiment. Furthermore, appointing Big 4 auditors is particularly important for firms to attract foreign capital during the 2008 global financial crisis.     

Does foreign institutional ownership increase return volatility? Evidence from China

This paper investigates the impact of foreign institutional ownership on firm-level stock return volatility in China, based on our study of a sample of 1458 firms between 1998 and 2008. The empirical results show that share ownership by foreign institutions (both financial and non-financial) increases firm-level stock return volatility, even after controlling for a complete ownership structure, firm size, turnover, and leverage, and correcting for potential endogeneity problems. However, the results also show that foreign individual shareholdings reduce volatility. Furthermore, we document a positive relationship between domestic shareholdings (individual, institutional, and governmental) and firm-level stock return volatility. Empirical results with interaction terms show that foreign institutional ownership increases firm-level return volatility by strengthening the positive impact of liquidity on volatility. The volatility reduction effect of foreign individual ownership is attenuated by government ownership suggests a poor governance environment as a result of the involvement of the Chinese government.     

Do banks really monitor? Evidence from CEO succession decisions

We demonstrate that banks play an important monitoring role in CEO succession that is not observed for other types of lenders, particularly public bondholders. There is a stronger relation between cash flow performance and forced CEO turnover for firms issuing bank debt during the year of CEO turnover than for firms not issuing bank debt, and bank debt issuance increases the likelihood of external CEO succession. The stock price reaction to CEO succession is higher when bank monitoring is prevalent. Our results are consistent with theories of relationship banking that propose a valuable monitoring role for well informed, incentivized bank lenders.     

Do stock-for-stock merger acquirers manage earnings? Evidence from Japan

This paper examines the earnings management behavior of Japanese merger acquirers on the Tokyo Stock Exchange. Most Japanese mergers are transacted via stock swaps, when acquirers have incentive to manage pre-merger earnings to reduce the cost of acquisition. Consistent with this incentive, Japanese acquirers have significantly positive long-term abnormal accruals in the year prior to the merger announcement. Further analyses suggest that acquirers’ extent of earnings management is an increasing function of their economic benefit at stake, and a decreasing function of monitoring by banks and foreign investors.     

Opportunistic earnings management or performance-related effects? Evidence from dividend-paying firms

We propose that much of the variation in standard (accruals and real-activities) earnings management metrics can be explained by firms' performance trajectories. We test our proposition using dividend change to distinguish high from low performance trajectory firms. We find that standard earnings management metrics have a stronger relation with performance trajectories than with unexpected earnings, a presumed target of earnings management. Firms that appear to manage earnings more are likelier to increase their dividends, but standard earnings management metrics do not explain changes in firm value around dividend change announcements. Applying standard earnings management metrics without taking performance trajectories into account can result in mistaking managers' efforts to increase firm value for earnings management.     

Do foreign investors insulate firms from local shocks? Evidence from the response of investable firms to monetary policy

Extant research shows that stock returns of investable firms are highly sensitive to foreign market and global information shocks, suggesting that having foreign investors might insulate investable firms from shocks to local fundamentals. Examining 24 emerging markets, we find that both investable and non-investable firms are sensitive to local monetary policy shocks. This allays the concern that emerging-market opening reduces the efficacy of local monetary policy. We also find that in 11 countries (46% of our country-sample), investable firms are more sensitive to local shocks than non-investable firms. Differences in leverage, stock liquidity, size, domestic product-market exposure, or industry cyclicality do not drive this finding.     

Do investors find carbon information useful? Evidence from Italian firms

The usefulness of carbon disclosures has been questioned in the literature because they do not truly reflect firm’s carbon performance, suggesting that they may not be useful for risk evaluation and investment decisions. This study empirically tests the usefulness of carbon information voluntarily disclosed by the Italian firms. Our results based on the price model show that there is a positive association between the stock price and carbon disclosures, suggesting that investors find carbon information useful for their investment decisions. We find similar results based on the market valuation model. Additionally, the results reveal that the positive association is especially strong for firms that have established environmental committees on a voluntary basis and also for firms from the highly polluting industries defined by the EU_ETS program, confirming that investors’ positive response is especially strong to carbon disclosures by firms from the highly polluting industries. We also find that the market reacts positively to carbon disclosures by firms with a higher percentage of independent directors on their corporate boards, but the positive association is marginally significant.     

How does competition affect real earnings management to meet or beat targets? Evidence from import tariff reductions

Targets provide incentives for earnings management, and a longstanding question is whether earnings management is undertaken opportunistically or to communicate private information about future firm value. To discriminate between these motivations, I follow analytical research showing that an increase in competition through a large decrease in tariffs disciplines managers and better aligns their interests with those of shareholders. Thus, if earnings management reflects managerial opportunism, then an increase in competition will decrease earnings management; and if it signals future performance expectations, then an increase in competition will increase earnings management. Consistent with earnings management indicating managerial opportunism, I show that an increase in competition decreases real earnings management to avoid reporting negative earnings or a negative change in earnings. In addition, by showing that the lessening of trade barriers through import tariff reductions reduces the use of real earnings management to meet or beat earnings targets, I provide evidence on the role of macroeconomic conditions as a determinant of earnings quality.     

Are individual investors liquidity providers around earnings announcements? Evidence from an emerging market

We first document that both buying and selling by individual investors before earnings announcements are negatively correlated with post-event abnormal returns using a unique dataset that allows us to precisely identify individual investor trading. Next, we show that both buying and selling by individual investors before earnings announcements not only are positively associated with contemporaneous returns, but also respond positively to past returns. This is consistent with the idea that individual investors act as liquidity providers (demanders) when they sell (buy) before earnings announcements. Individual investor buying and individual investor selling after earnings announcements confirm this point.     

Is earnings management opportunistic or beneficial? An agency theory perspective

Earnings management has been cast into negative light due to the recent corporate scandals and, therefore, is viewed as detrimental to the firm. Enron and Worldcom represent two of the most egregious cases of opportunistic earnings management that led to the largest bankruptcies in U.S. history. However, some argue that earnings management may be beneficial because it improves the information value of earnings by conveying private information to the stockholders and the public. We offer agency theory as a tool to distinguish between the opportunistic and beneficial uses of earnings management. The empirical evidence suggests that firms where earnings management occurs to a larger (less) extent suffer less (more) agency costs. Moreover, a positive relation is documented between firm value and the extent of earnings management. Taken together, the results reveal that earnings management is, on average, not detrimental.