Group Of Investors Research Articles

External funding and emergent technology inputs

The research and development (R&D) process is critical to a firm’s competitive advantage and often requires external funding. Yet, we know little about how different types of investors respond to the cash needs of established R&D intensive firms nor about how external financial analysts influence those decisions. We address these gaps by examining how a firm’s patenting activity affects its ability to raise cash. We distinguish the motivations of two investor groups: open-market and alliance partners. We focus on how patents based on emergent technologies impact two types of investors and their willingness to fund the R&D process. We develop theory and test our hypotheses using data from publicly traded biopharmaceutical firms by drawing upon knowledge-based view, alliance, and investment theories. We find evidence that patents built upon emergent technologies are viewed differently by the two types of investors. We find open market investors were less likely to invest in emergent technologies and invested less when they did. Conversely, alliance partner investors would be more appreciative of the opportunities new technology inputs present, thus, more likely to invest in firms using emergent technologies and invest more.

3% rules the market: herding behavior of a group of investors, asset market volatility, and return to the group in an agent-based model

This study presents an agent-based model of capital markets by adopting simple trading rules for bounded rational agents who maintain different expectations regarding a tipping point at which price starts to change its direction from rising (falling) to falling (rising). The effect of herding behavior on the volatility of stock market prices and the rate of return to the herding group are investigated by dividing agents into one or more groups. Herding behavior by a group of agents leads to high market volatility and high return for the agents in the group. Maximum rate of return is reached when the group size is approximately 3% of the total number of agents. This finding is consistent with the actual degree of herding behavior in markets found by empirical studies. However, the rates of return decrease when the group size exceeds 3%, and the premium of the herding group tends to disappear when the group size reaches a certain level (20%) compared with that of non-herding groups. Reducing the number of groups (or increasing the average size of the herding groups) leads to high price volatility.

Institutional investment horizons and firm valuation around the world

Using a comprehensive dataset of firms from 34 countries, we study the effect of institutional investors’ investment horizons on firm valuation around the world. We find a positive relation between institutional ownership and firm value that is driven by short-horizon institutional investors. Accounting for the interaction between investors’ investment horizon and nationality, we show that foreign short-horizon institutions, which are more likely to discipline managers through the threat of exit rather than engaging in monitoring made costly by the liability of foreignness, are the investor group with the strongest effect on firm value. Reinforcing the threat of exit channel, we find that the value-enhancing effect of short-horizon investors is stronger in the presence of multiple short-horizon investors, who are more likely to engage in competitive trading. The positive valuation effect of short-horizon investors is stronger when stock liquidity is high, which makes the exit threat more credible, and in firms prone to free cash flow agency problems. Overall, our results are consistent with short-horizon institutional investors, especially foreign institutional owners, affecting firm value by disciplining managers through a credible threat of exit.

From point through density valuation to individual risk assessment in the discounted cash flows method

AbstractWe review the developments and practice of the discounted cash‐flow method in finance with an intermediate goal of presenting parsimonious methods of generating density valuation rather than point forecasts. Our ultimate aim is to select, propose and discuss some density‐based risk measures that may be used by appraisers and investment analysts when conducting discounted cash‐flow valuation for broad group of heterogeneous (by risk appetite) final users or investors. Such a toolbox may be applied directly by the latter group without necessity to rely on aggregated point valuations and recommendations.

Financial contagion and the wealth effect: An experimental study

We design a laboratory experiment to test the importance of wealth as a channel for financial contagion across markets with unrelated fundamentals. In a sequential global game, we analyze the decisions of a group of investors that hold assets in two markets. We consider two treatments that vary the level of diversification of these assets across markets. In both treatments, we find evidence of financial contagion. When investors have completely diversified portfolios, we provide evidence of contagion due to a wealth effect: for certain ranges of fundamentals, we show that a decrease in wealth from the investment in the first market makes withdrawals more likely in the second, thereby increasing the probability of a crisis. When portfolio diversification is small, then social imitation is relevant in explaining contagion.

Where Do Institutional Investors Seek Shelter when Disaster Strikes? Evidence from COVID-19

During the COVID-19 crash, U.S. stocks with higher institutional ownership performed worse. This under-performance was unrelated to revisions in earnings expectations, which suggests a disconnect between stock prices and firm fundamentals. Two mechanisms were at play: Institutions faced a sudden increase in redemptions and simultaneously attempted to de-risk their equity portfolios. Most types of institutional investors re-balanced portfolios toward financially strong firms, whereas hedge funds sold stocks indiscriminately. Data from a discount brokerage (Robinhood) confirm that retail investors provided liquidity. Overall, the results suggest that when a tail risk realizes, institutional investors amplify price crashes.

Behavioral heterogeneity in return expectations across equity style portfolios

AbstractWe estimate a heterogeneous agent model on five prominent equity investment styles—value, size, profitability, investment, and momentum—and find evidence for behavioral heterogeneity in expected return formation. Our model features two groups of boundedly rational investors, fundamentalists and chartists, whose demand functions for the investment styles depend on their respective expected style return forecasts. The fundamentalists form return expectations using a model based on time‐varying stock‐level characteristics and dynamic factor premia, and the chartists do so based on heuristics commonly employed by technical analysts, such as moving average rules. Our results cast doubt on the theories that assume perfect rationality of the representative agent in financial markets, and give support to the behavioral theories with heterogeneous agents.

Attention Triggers and Investors' Risk-Taking

This paper investigates how individual attention triggers influence financial risk-taking based on a large sample of trading records from a brokerage service that sends standardized push messages on stocks to retail investors. By exploiting the data in a difference-in-differences (DID) setting, we find that attention triggers increase investors' risk-taking. Our DID coefficient implies that attention trades carry, on average, a 19-percentage point higher leverage than non-attention trades. We provide a battery of cross-sectional analyses to identify the groups of investors and stocks for which this effect is stronger.

Facebook confessions: Corporate abdication and Silicon Valley dystopianism

This article investigates the public confessions of a small group of ex-Facebook employees, investors, and founders who express regret helping to build the social media platform. Prompted by Facebook’s role in the 2016 United States elections and pointing to the platform’s unintended consequences, the confessions are more than formal admissions of sins. They speak of Facebook’s capacity to damage democratic decision-making and “exploit human psychology,” suggesting that individual users, children in particular, should disconnect. Rather than expressions of truth, this emerging form of corporate abdication constructs dystopian narratives that have the power shape our future visions of social platforms and give rise to new utopias. As such, and marking a stark break with decades of technological utopianism, the confessions are an emergent form of Silicon Valley dystopianism.

Share Repurchase under Diverging Beliefs about Carbon Risk

Diverging beliefs about the impact of climate policy on the value of fossil fuel assets can lead investors to different valuations of fossil fuel companies. This paper models the share price formation in a market where one group of investors systematically overestimate future prices, and explores how firms can maximise firm value through share repurchases by responding to changing investor beliefs. We find that the optimal buyback strategy reduces the impact of price volatility on share prices, i.e. the optimal response of the firm is to counteract price variations. When expectations to future prices drop, the optimal response is to buy back shares. Furthermore, we show that the optimal buyback strategy can lead to a persistent and higher share of investors who overestimate future share value compared to the case where the supply of shares are fixed. The result implies that buybacks can dampen price signals originating from fossil fuel divestment. In the light of substantial engagement in buyback programs observed in the US oil sector, divestment is unlikely to have had any significant effect on share prices or firm valuations in this sector.

Institutional investment in online business lending markets

We provide new insights into the business lending decisions of institutional investors in online credit markets by benchmarking their lending performance against that of retail investors.We find superior performance for loans financed by institutional investors, although large sized retail investor groups achieve equivalent performance. Lending decisions of institutional investors are not default risk minimising, and we quantify lending inefficiencies. From a platform perspective, we show that (i) the platform-administered loan allocation process is not biased in favour of institutional investors, (ii) institutional participation in the retail marketplace is not a distorting factor in loan performance, and (iii) the platform’s move to a fixed rate system had detrimental effects on loan outcomes for institutional investors. The superior loan performance achieved by institutional investors is confined to the auction period, when institutional investors had autonomy over setting interest rates.

Determinants of Private Investors’ Behavior on Russian Stock Market

The article explores behavior features of different group of private investors on the Moscow and Saint Petersburg stock exchanges. It was found that the change in the size of the biggest group of registered broker clients on Moscow Exchange depended heavily on growth of real income and key characteristics of passive forms of income, such as deposit rates, government bond returns and stock dividend yield. Active broker clients on the Moscow stock exchange mainly focused on more speculative factors, such as equity premium, equity volatility, foreign stocks’ returns and exchange rate. The growth of individual investment accounts depended on factors of both active and speculative forms of income. The quantity of broker clients on Saint-Petersburg Exchange relied on an even wider set of factors, which included not only risk and returns on national markets, but also characteristics of foreign assets and exchange rates. The two Russian exchanges are interrelated. The bond and equity premium growth makes the national market more attractive than foreign assets. The expansion of private investors on the stock market in Russia, which began in 2018, is explained not only by a search for other investment instruments apart from deposits, especially under the ongoing decline in interest rates, but also by a growing interest in individual investment accounts. The latter represent a positive example of state influence on people’s savings through tax policy. Another factor of the raise of private investments was the implementation of modern investment platforms and active promotion of broker services by major banks. The financial crisis which begun in March 2020 can become a serious challenge for millions of private investors who had opened accounts in the previous two years.

The Impact of the COVID-19 Pandemic on the Biotech Industry.

The Impact of the COVID-19 Pandemic on the Biotech Industry.

Know Your Clients' Behaviours: A Cluster Analysis of Financial Transactions

In Canada, financial advisors and dealers are required by provincial securities commissions and self-regulatory organizations--charged with direct regulation over investment dealers and mutual fund dealers--to respectively collect and maintain Know Your Client (KYC) information, such as their age or risk tolerance, for investor accounts. With this information, investors, under their advisor's guidance, make decisions on their investments which are presumed to be beneficial to their investment goals. Our unique dataset is provided by a financial investment dealer with over 50,000 accounts for over 23,000 clients. We use a modified behavioural finance recency, frequency, monetary model for engineering features that quantify investor behaviours, and machine learning clustering algorithms to find groups of investors that behave similarly. We show that the KYC information collected does not explain client behaviours, whereas trade and transaction frequency and volume are most informative. We believe the results shown herein encourage financial regulators and advisors to use more advanced metrics to better understand and predict investor behaviours.

Social media visibility, investor diversity and trading consensus

PurposeThe purpose of this paper is to investigate the effects of Facebook users' responses to corporate Facebook posts on investor diversity and trading consensus.Design/methodology/approachThe authors collect publicly available data on corporate Facebook posts and user responses to such posts. They use the OLS regression framework to analyze the effects of such Facebook activities on institutional ownership percentage and trading consensus among investors.FindingsThe authors find that Facebook users' responses to corporate Facebook posts reduce large institutional investors' ownership. Their interpretation for this finding is that such Facebook activities increase the visibility of the companies across a more diverse group of investors. This increased visibility especially makes information more accessible to smaller investors so that they are attracted to invest more in these companies. They also find that Facebook activities increase the buy-sell consensus among investors, indicating that the information disseminated through social media reduces the disagreements among investors.Research limitations/implicationsThis paper examines the effects of user reactions to all kinds of corporate Facebook posts without separately identifying the types of posts such as advertising, financial information and corporate news. Future research may try to identify the differential effects of specific types of posts and reactions on investor diversity.Practical implicationsThe results suggest that social media has become a new and effective supplement to traditional disclosure channels in making information available to all investors in the capital market.Originality/valueThis paper is among the first to document the effects of corporate disclosures on social media in changing investor composition and reducing the information gap among investors.

Birds of a Feather Flock Together: The Inclusive Effect of Similarity Patterns in Equity Crowdfunding

Crowdfunding is helping to drive financial inclusion by expanding the availability of funds to traditionally excluded and underserved groups of individuals, such as ethnic minority and female entrepreneurs. This study verifies how ethnic and gender similarity between investor and entrepreneur can affect the invested amount in an equity crowdfunding campaign. Using an integrated approach with linear regression and Shapley decomposition, we analyze 8600 investments made by 5996 unique personal shareholder investors in 81 equity crowdfunding campaigns. Results show that similarity patterns seem to significantly influence the amount invested in a campaign but their effects change according to investor’s gender and ethnic origin. In fact, even if female investors give a higher amount to men-led companies, their preference changes if the company is run by a female founder belonging to the same ethnic minority group. Results emphasize equity crowdfunding’s potential as a tool for the financial inclusion of ethnic minority groups of investors and entrepreneurs.

Stock Market Contagion during the Global Financial Crises: Evidence from the Chilean Stock Market

The study examines evidence for the transmission of the US and EU financial crises via investor holdings into the Chilean stock market following two global financial crises, in 2008 and 2011. The study modified the models of Bekaert et al. (2014), and Dungey and Gajurel (2015) on the 2007–2009 global financial crisis and extends the period to include the European debt crisis of 2010–2011. The study produced three main contributions. First, changes in the equity holdings of retail investors were a key source of contagion following the 2008 US financial crisis. Second, investor herding during the 2011 financial crisis is shown to be low based on the co-movement of equity holdings between the four investor groups studied. Third, investor behavior during the 2011 EU crisis differs from that of the 2008 US financial crisis, which we attribute to firms in Chile adopting international financial reporting standards (IFRS) and improving their corporate governance. We compared the findings to the prior contagion studies that rely on Chilean return data to highlight the contributions to international financial research, particularly as it relates to the functioning of emerging capital markets during financial crises.

Auditor Going Concern Opinions and Bank Systemic Risk: Evidence from the 2007–2009 Financial Crisis

SUMMARYFollowing the 2007–2009 financial crisis, regulators and investor groups alleged that auditors were reluctant to issue going concern opinions (GCOs) to distressed banks during the crisis, raising questions about the quality of auditors' GCO decisions. This paper investigates whether systemic risk influences auditors' GCO decisions during the crisis due to potential adverse spillover effects. Using 496 bank-year observations, we find that auditors are less likely to issue a GCO to systemically risky banks, and this auditor behavior reduces Type I errors without increasing Type II errors. The effects are more pronounced during the crisis period, especially for banks that are large and connected, have lower litigation risk, or are audited by Big 4 auditors or industry specialists. Overall, our findings suggest that during the crisis period, auditors were less likely to over-issue GCOs to systemically risky banks, resulting in more accurate GCOs.JEL Classifications: M42; G20.

On Issue of a Management Company as a Participant in the Securities Market

The need for inflow of additional investment resources into Russias economy in order to finance infrastructural and social projects demand improving the existing mechanisms of accumulation and investment of free monetary funds of the population and economic entities. The foreign experience testifies that to achieve this goal it makes sense to develop the corresponding institutions of the financial market. An important role in mobilizing longterm resources is called upon to be played by the funds controlled by the intermediaries of the security market - the management companies. In view of this, the topical items for the study are the issues of management companies functioning and identification of their place in the structure of the security market. An analysis of the Russian legislation and economic literature testifies that the issue of inclusion of the management company into this or that group the security market participants needs an upgrade. The article shows that the management company is an institutional investor of the security market, which functions on the qualified basis and is classified as a group of collective investors.

Does a Local Bias Exist in Equity Crowdfunding? The Impact of Investor Types and Portal Design

We use hand-collected data of 20,460 investment decisions and two distinct portals to analyze whether investors in equity crowdfunding direct their investments and portfolios to local firms. The results suggest that investors exhibit a local bias, even when controlling for family and friends. In addition to the regular crowd, our sample includes angel investors who invest considerable amounts and exhibit a larger local bias. By contrast, well-diversified investors are less likely to suffer from this behavioral anomaly. The data further show that portal design is important for attracting investors more prone to having a local bias. Finally, firms engaging in equity crowdfunding overcome funding barriers by attracting investors at all distances. These findings corroborate regulation targeted to specific investor groups, advise managers of equity crowdfunding portals about their business model, and inform individual investors of their biases.