Characteristics Of Institutional Investors Research Articles

Birds of a feather flock together: Institutional investors with disciplinary history and financial reporting

This study examines the role of financial misconduct of institutional investors on financial reporting quality of investee firms. We find that the firms held by institutional investors with disciplinary history (IDH) are more likely to engage in financial misreporting. Our results are not driven by institutional investor characteristics such as activism, incentives to monitor, investment horizon, or portfolio size. The impact of IDH is stronger in the firms that are more likely to engage in financial misreporting (i.e., the firms that barely meet analysts’ expectations and with CEOs with higher career concerns). IDH have stronger impact on financial misreporting when the institution reports multiple disciplinary events, the disciplinary event is recent, or disciplinary action is taken against the institutional investor company rather than just its affiliates. Results continue to hold after implementing various statistical tests to address potential endogeneity issues and alternative measures of financial misreporting.

The ethical obligations of institutional investors: Managing moral complexity

AbstractInstitutional investors control almost 60% of all assets under management worldwide and encompass a wide variety of organizations. Despite this reach, however, institutional investors have not received the normative scrutiny they merit beyond general discussions around their legally grounded fiduciary obligations to their beneficiaries. This paper offers a discussion of institutional investor ethical obligations in light of their specific attributes. We propose that the different characteristics of institutional investors and the diverse roles they play in the marketplace inform the scope of their activities, and, in turn, the different ways in which their basic ethical obligations can be fulfilled.

Limited Attention Bias and Institutional Investor Characteristics

We test for limited attention bias in institutional investor trading, when news is stale. Using the universe of transaction-level data in the U.S. corporate bond market around stale downgrades, we find an abnormal increase in trading volume, abnormal bond returns and a subsequent reversal. We do not find a reversal for abnormal bond returns associated with informative rating actions. We then focus on the largest, domestic, institutional investors, thus matching investor characteristics to individual transactions. We document an association between restatements and abnormal trading on stale news. These results provide supportive evidence that limited attention bias affects institutional investors.

Institutional Investor Preferences: Evidence from Exchange-Traded Notes

We use the introduction of exchange-traded notes (ETNs) as a way to examine which characteristics of institutional investors’ preferences are generalizable across new types of security design, as well as to infer which of the novel characteristics of ETN are in demand from institutions. As with equities, we find that institutions are drawn to ETNs with higher levels of capitalization, liquidity, and risk. Unlike in equity markets, we find no association between past returns, representing either momentum of contrarian patterns, and institutional preferences for ETNs. Instead, institutions engage in contrarian behavior by chasing underpriced ETNs. Lastly, we find changes in institutional holdings to be positively associated with future ETN returns. Overall, our results suggest that preferences of institutional investors are robust across security types, but that inferences made only with regard to equities can be incomplete.

Let The Bear Beware: The Inopportune Timing of Stock Recalls

We show that stock price declines are preceded by periods of high recall pressure when diminishing brokers' inventory exerts binding influence on short positions. Institutional lenders that rely on private information and those with better historical performance time recalls more accurately. These results indicate that recalls force the liquidation of otherwise profitable short positions before their optimal maturity and result in an implicit sharing of gains between short sellers and lenders. We find that short sellers' losses are higher in informationally transparent stocks but lower when borrowing can be diversified across multiple lenders, suggesting that greater exposure to a strong negative signal in the lender pool increases recall risk. Overall, this paper identifies important properties of the recall risk and establishes its relationship to characteristics of institutional investors.

A Study on the Performance Characteristics of Institutional Investors’ Delegated Funds in Korean Market

A Study on the Performance Characteristics of Institutional Investors’ Delegated Funds in Korean Market

To Lend or Not to Lend: The Effect of Equity Lenders’ Preferences on the Shorting Market and Asset Prices

We study the relationship between asset prices and short sale constraints by investigating how characteristics of institutional investors affect their willingness to lend stock to short sellers. We find that stocks with higher portfolio weights and stocks in which institutional investors traded successfully in the past are less likely to be lent out. Using these characteristics, we instrument the component of the short interest that is due to short sale constraints arising from lenders’ preferences. We relate this short-sale constraint measure to future stock performance and find strong evidence that stocks with higher short sale constraints deliver lower future returns. This relationship is more pronounced for stocks with lower information transparency, consistent with the hypothesis that short sale constraints combined with the investors’ dispersion of opinion cause stock overvaluation.

The governance effect of institutional stakeholders on family-controlled companies’ earnings management

The characteristics of institutional investors are that they hold massive funds and possess investment expertise; therefore, these investors are expected to have an influence on corporate governance. This study explores the supervising effect of active and passive institutional investors on company’s earnings management in Taiwan, and whether the supervising effect differs between family and non-family-controlled companies or not. The empirical results show that institutional investors are significantly related to earnings management in both family and non-family-controlled companies. Moreover, active investors have more impact on earnings management than passive ones in family-controlled companies. Institutional investors, especially active investors, have been shown to have significant governance effect; therefore, companies are encouraged to attract institutional investors to enhance corporate governance.

Auditor choice and institutional investor characteristics after the Enron scandal in the French context

This study examines the association between the quality of audit and the characteristics of institutional investors, using French data. After the Enron scandal, the perception of the Big 4 by French institutional investors changed. Our first hypothesis focuses on the relation between French institutional investors and the choice of Big 4 auditors. Our second hypothesis deals with the perception of the foreign institutional investors to choose one of the Big 4 auditors due to the lack of investor protection in France and the failure of Enron. We tested our hypotheses on a sample of 144 companies listed on SBF 250, obtained from Worldscope data between 2000 and 2007. Empirical results show a negative and statistically significant link between the choices of one of Big 4 auditor by French institutional investors after the Enron scandal, whereas there is a positive and statistically insignificant link between the foreign institutional investor and the Big 4 appointment after 2002.

Investor Heterogeneity and Trading Around Earnings Announcements

We examine the impact of institutional investor heterogeneity on the firm’s information environment and trading. We argue that treating institutional investors as a single group of sophisticated investors masks fundamental differences in investor ability to gather and analyze information, which play a crucial role in the firm’s information environment. We find that heterogeneity in characteristics of institutional investors related to their informedness about the firm (proxied by investor size, general, stock-specific and local expertise, investor type, and portfolio focus, as well as ex post portfolio performance) increases abnormal trading volume around corporate news, above and beyond the effects of the average level of investor information about the firm.

Characteristics of institutional investors and discretionary accruals

PurposeThe purpose of this paper is to examine the differential effects of institutional non‐blockholders (NONB) and active institutional blockholders (ACTB) on earnings management behavior, as measured by discretionary accruals.Design/methodology/approachThis paper also proposes that the hypothesized influence of NONB and ACTB on earnings management behavior is affected by earnings pressure (EP) (i.e. the gap between target earnings and pre‐managed earnings). In particular, it believes that the stimulating effect of NONB on earnings management may not manifest when the stimulating effect of EPs is already strong and the mitigating effect of ACTB may manifest only when the stimulating effect of EP is there. The sample into three EP conditions: pressure to increase earnings, neutral pressure and pressure to decrease earnings is grouped. Consistent with the expectations, the paper finds that NONB stimulates earnings management, but only when EP is not strong and that ACTB mitigates earnings management, but only when there is pressure to increase earnings.FindingsThis paper also predicts that ACTB will need to exercise their monitoring power only when EP is strong. The results confirm this prediction, but only when there is strong pressure to increase earnings. When there is strong pressure to decrease earnings, inconclusive evidence regarding the effect of ACTB is found. This may imply that ACTB are conservative since they appear to be more likely to limit income‐increasing accruals than they are to limit income‐decreasing accruals.Originality/valueThis paper's contributions to the literature are twofold: the paper shows that the characteristics of institutional investors (INSTs) should be considered when examining the relationship between INSTs and earnings management; the paper shows that the direction and level of EP should be considered when evaluating the relationship between INSTs and earnings management.

Institutional Ownership and Stock Liquidity

The study examines the relationship between institutional ownership and liquidity of stocks, focusing on the effect of institutions' information advantage on liquidity. The information advantage of institutions can affect liquidity through two channels: adverse selection and information efficiency. The adverse selection effect results from an increase in information asymmetry. The information efficiency effect, however, results from an increase in competition among institutions. Competition promotes the rate at which private information is incorporated into prices, reducing uncertainty about future payoffs. I find evidence of a nonmonotonic (U-shaped) relationship between the fraction of shares of a firm held by institutions and various measures of stock liquidity. This evidence of a nonmonotonic relationship strongly suggests that the two effects coexist and interact with each other. The effect of information advantage of institutions on liquidity also varies with the amount of publicly available information and asset risk. My evidence indicates that institutional ownership (Granger) causes liquidity, allaying, to an extent, concerns that findings are a result of institutions' preference for liquid stocks. Lastly, I document that institutional investor characteristics, such as investment horizon and risk aversion, also affect liquidity. Liquidity decreases with both increases in fraction of equity held by long-term investors and risk aversion of institutional investor.

Characteristics of Institutional Investors and Discretionary Accruals

This paper examines the differential effects of institutional non-blockholders (NONB) and active institutional blockholders (ACTB) on earnings management behavior, as measured by discretional accruals. We propose that NONB stimulates and ACTB mitigates earnings management. We believe that institutional investors do not always work as monitors as suggested by some previous literature. Hence, we propose that institutional non-blockholders are more interested in short-run performance than are institutional blockholders and that this interest creates pressure on management to deliver high earnings. Moreover, we believe that active institutional blockholders exercise their monitoring power more than passive institutional blockholders. Accordingly, we propose that institutional blockholders who are willing to challenge management are active monitors and will reduce the likelihood of earnings management. We also propose that the hypothesized influence of NONB and ACTB on earnings management behavior is affected by earnings pressure (i.e. the gap between target earnings and pre-managed earnings). In particular, we believe that the stimulating effect of NONB on earnings management may not manifest when the stimulating effect of earnings pressures is already strong and the mitigating effect of ACTB may manifest only when the stimulating effect of earnings pressure is there. We group our sample into three earnings pressure conditions: pressure to increase earnings, neutral pressure and pressure to decrease earnings. Consistent with our expectations, we find that NONB stimulates earnings management, but only when earnings pressure is not strong and that ACTB mitigates earnings management, but only when there is pressure to increase earnings. Our study's contributions to the literature are twofold: 1) we show that the characteristics of institutional investors should be considered when examining the relationship between institutional investors and earnings management; 2) we show that the direction and level of earnings pressure should be considered when evaluating the relationship between institutional investors and earnings management.