Increase In Institutional Ownership Research Articles

Skill or Effort? Institutional Ownership and Managerial Efficiency

Using a sample of U.S. firms during the 1989–2015 period, we study whether the efficiency with which managers generate revenue is sensitive to monitoring by institutional shareholders. We find that institutional ownership is positively related to managerial efficiency. Our identification relies on a discontinuity in ownership around the Russell 1000/2000 Index threshold and suggests that the positive effect of institutional ownership on managerial efficiency is causal. Furthermore, we find consistent results after excluding from our sample forced CEO turnovers, suggesting that institutional shareholders force incumbent managers to exert greater effort rather than influence the replacement of less efficient CEOs. Finally, we document that monitoring by institutions helps improve managerial efficiency, and that an exogenous increase in institutional ownership leads to higher pay-for-performance sensitivity. Taken together, our findings highlight the important role played by institutional shareholders in getting the most out of corporate executives.

Do audit quality, political connection, and institutional ownership increase real earnings management? Evidence from Indonesia

The objectives of this study are to evaluate the influence of audit quality (auditor size and auditor tenure), political connections, and institutional ownership toward real earnings management. In this research, real earnings management was determined by abnormal cash flow from operations. Purposive sampling was conducted and 83 manufacturing companies registered in Indonesian Stock Exchange during 2010-2014 (415 firm-years) were acquired as the samples. For testing the hypotheses, panel data regression with random effect model was used. The findings showed that auditor size and institutional ownership had a positive influence toward real earnings management, while auditor tenure and political connections did not influence real earnings management. The control variables testing showed that firms' leverage and firms' loss had negative influence toward real earnings management. On the other hand, cash ratio had a positive effect toward real earnings management.

Do audit quality, political connection, and institutional ownership increase real earnings management? Evidence from Indonesia

Do audit quality, political connection, and institutional ownership increase real earnings management? Evidence from Indonesia

Institutional Ownership, Peer Pressure, and Voluntary Disclosures

ABSTRACT We document peer effect as an important factor in determining corporate voluntary disclosure policies. Our identification strategy relies on a discontinuity in the distribution of institutional ownership caused by the annual Russell 1000/2000 index reconstitution. Around the threshold of the Russell 1000/2000 index, the top Russell 2000 index firms experience a significant jump in institutional ownership compared with their closely neighbored bottom Russell 1000 index firms due to index funds' benchmarking strategies. The increase in institutional ownership and resultant improvement in the information environment of the top Russell 2000 index firms create pressures on their industry peers to increase voluntary disclosures. Consistent with this prediction, we find that the discontinuously higher institutional ownership of the top Russell 2000 index firms significantly increases industry peers' likelihood and frequency of issuing management forecasts. Further analyses show that such an effect could be driven by firms' incentive to compete for capital. JEL Classifications: G23; G34; M41; D80. Data Availability: Data are available from the public sources cited in the text.

Abnormal investment, changes in institutional ownership, and SEO long-run performance

PurposeThe purpose of this paper is to investigate that how firms’ pre-issue investment levels and changes in institutional ownership (IO) affect their long-run performance after seasoned equity offerings (SEOs).Design/methodology/approachThe authors use Richardson’s (2006) method to measure firms’ pre-issue investment levels and then divide the SEO firms into the under-, normal-, and overinvesting groups. The study examines the relation between the pre-issue abnormal investment and long-run post-issue performance. In addition, the authors examine whether changes in IO around SEOs affects SEO firms’ performance.FindingsThe authors find a quadratic relation between the pre-issue abnormal investment and the long-run post-issue performance. In other words, the underinvesting and overinvesting groups tend to underperform. The authors also find that changes in IO around SEOs positively associate with firms’ long-run performance.Research limitations/implicationsThe authors ascribe the underperformance of underinvesting firms to the deficiency of good growth opportunities; for overinvesting firms, the authors link to the misalignment problem of managerial incentive (i.e. empire building).Originality/valueThe results suggest that long-run investors should be cautious of buying new-issue shares of underinvesting and overinvesting firms, especially those with insignificant increases in IO.

Do Institutional Investors Influence Firm Social Performance?

This study examines whether passive institutional investors influence Corporate Social Responsibility (CSR). The literature shows conflicting evidence about the effect of institutional investors on CSR, which might indicate problems associated with endogeneity. We analyze the causal effect of passive institutional investors on CSR by exploiting a source of exogenous variation in passive institutional ownership due to the inclusion in the Russell 2000. Our findings indicate that a 1% increase in passive institutional ownership reduces in 7.6% the probability of improving CSR. This effect is economically stronger for those firms that have a higher level of CSR compared to industry peers. The results are robust to the inclusion of additional determinants of CSR such as profitability or firm size.

A study on institutional investors selecting better stocks: Evidence from SEOs in China

Using the data of stock returns and the variations of quarterly institutional ownership around Secondary Equity Offerings (SEOs) in China from 2004 to 2008, we verify that institutional investors are smart in selecting stocks. Sorting the SEOs samples into two groups according to whether there is an increase or decrease in institutional ownership, we find no significant difference in stock returns between the two groups before SEOs, but higher returns among the group with increases in institutional ownership over 1 month, 3 month, 6 month, 9 month, 12 month and 18 month periods, respectively. This result indicates the evidence of the stronger stock selection ability of institutional investors.

Common Asset Holdings and Stock Return Comovement

A growing literature highlights the effect of common asset holdings on market dynamics. Focusing on relatively large stocks, Anton and Polk (2014) find that assets with many common investors comove more strongly in the future than otherwise similar stocks. In order to acknowledge the shift in institutional preferences over the last two decades we perform a similar analysis but also include small stocks in our sample. Our main findings are as follows: first, we document a strong increase in both institutional ownership and common asset holdings over the sample period, particularly so for the smallest stocks. Second, raw stock return correlations have also increased strongly over time, while the increase is much more modest for factor model residual correlations. Third, we confirm that common ownership is significantly related to future return correlations for relatively large stocks, but the relationship appears to become less important over time. For relatively small stocks the relationship is often insignificant, but the effect appears to become more important over time. Lastly, we find no evidence that institutional ownership Granger-causes return correlations for the subset of small stocks.

Does obfuscating excessive CEO pay work? The influence of remuneration report readability on say-on-pay votes

This paper assesses whether reducing ‘readability’ is an effective obfuscation strategy for influencing the level of shareholder say-on-pay voting dissent in firms with excessive CEO pay. Based on a sample of UK-listed firms, our results indicate that in cases of excessive CEO pay, a less readable remuneration report is associated with reduced say-on-pay voting dissent. However, the effect of the obfuscation strategy diminishes as institutional ownership increases. Using obscurely written remuneration reports may even backfire (i.e. associated with increased voting dissent) when a firm’s majority shares are held by institutional investors. Our results are robust to controlling for compensation contract complexity as well as other alternative explanations. The results are also robust to various controls for endogeneity including a two-stage instrumental variable approach and propensity-score matching. Our findings offer regulatory implications that regulators could minimize the use of ‘obfuscation’ in pay-related disclosures by prescribing how information is to be presented.

Institutional Ownership and Corporate Tax Avoidance: New Evidence

ABSTRACT We provide new evidence on the agency theory of corporate tax avoidance (Slemrod 2004; Crocker and Slemrod 2005; Chen and Chu 2005) by showing that increases in institutional ownership are associated with increases in tax avoidance. Using the Russell index reconstitution setting to isolate exogenous shocks to institutional ownership, and a regression discontinuity design that facilitates sharper identification of treatment effects, we find a significant and discontinuous increase in tax avoidance following Russell 2000 inclusion. The tax avoidance involves the use of tax shelters, and immediate benefits include higher profit margins and likelihood of meeting or beating analyst expectations. Collectively, the results shed light on the effect of increased ownership concentration on tax avoidance.

The Effect of Institutional Ownership on Payout Policy: Evidence from Index Thresholds

We show that higher institutional ownership causes firms to pay more dividends. Our identification relies on a discontinuity in ownership around Russell index thresholds. Our estimates indicate that a one-percentage-point increase in institutional ownership causes a $7 million (8%) increase in dividends. We also find differences in shareholder proposals and voting patterns that suggest that even nonactivist institutions play an important role in monitoring firm behavior. The effect of institutional ownership on dividends is stronger for firms with higher expected agency costs.

Does institutional ownership increase stock return volatility? Evidence from Vietnam

The literature on institutional ownership and stock return volatility often ignores small emerging countries. However, this issue is more profound, due to the large size of institutional investors and small stock market size, in emerging equity markets. This paper examines the effects of the institutional ownership on the firm-level volatility of stock returns in Vietnam. Our data cover most of non-financial firms listed on the Ho Chi Minh City stock exchange for the period 2006–2012. Employing different analysis techniques for panel data and controlling for possible endogeneity problems, our empirical results suggest that institutional investors stabilize the stock return volatility. Moreover, we document that: i) the stabilizing effect of institutional investor ownership is higher in dividend paying firms, and ii) if firms are paying out more dividends, this stabilizing effect is greater. Our results outline the important role of institutional investors in maintaining the stability in emerging stock markets.

Short-Term Investors, Long-Term Investments, and Firm Value

This paper shows that an inflow of short-term institutional investors pressures firms to cut R&D investment to report higher earnings and to generate positive earnings surprises, and also leads to temporary boosts in firm valuations. When these short-term investors subsequently leave, the reductions in R&D, higher earnings, and the increase in firm valuations are reversed. Our identification strategy exploits plausibly exogenous variation in the presence of short-term investors around Russell 2000 index inclusions, which are associated with a sharp temporary inflow of short-term institutions and a permanent increase in institutional ownership and analyst coverage.

Institutional Ownership and Corporate Tax Avoidance: New Evidence

We provide new evidence on the agency theory of corporate tax avoidance (Slemrod, 2004; Crocker and Slemrod, 2005; Chen and Chu, 2005) by showing that increases in institutional ownership are associated with increases in tax avoidance. Using the Russell index reconstitution setting to isolate exogenous shocks to institutional ownership, and a regression discontinuity design that facilitates sharper identification of treatment effects, we find a significant and discontinuous increase in tax avoidance following Russell 2000 inclusion. The tax avoidance involves the use of tax shelters, and immediate benefits include higher profit margins and likelihood of meeting or beating analyst expectations. Collectively the results shed light on the effect of increased ownership concentration on tax avoidance.

Capital Supply, Financial Intermediaries, and Corporate Peer Effects

We document “supply-side” channels that connect peer firms’ financial policies. We find constrained firms’ equity issuance decisions depend on peers’ recent SEO activity, and that common financial intermediaries strengthen the transmission of peer effects. Constrained firms react positively to peer SEO announcements, and analyst coverage and institutional ownership increase following peer firms’ SEOs. Constrained firms’ SEO announcement returns and underwriting fees improve with “their” underwriters’ recent peer-SEO experience. Peer effects are pronounced when there is more overlap with peers’ financial intermediaries and major shareholders. We conclude that supply-side effects are key in the transmission of peer-to-peer financial policies.

The Pay Inequality Conundrum: Examining Governance Antecedents of CEO-Employee Pay Ratio

CEO-employee pay inequality has increased dramatically in the U.S., yet the factors contributing to organizational inequality, as well as the role of corporate governance, remain unclear. Using longitudinal data for 1998-2013, we investigate how the displacement of direct, residual-risk-bearing shareholders, by intermediary investors has affected pay inequality. Our study sheds light on the role of corporate governance on organizational pay inequality, in light of the widespread pay-for-stock price-performance and transformation of corporate ownership; but it also raises questions regarding shareholders’ commitment to the long-term competitiveness of the firm vis-a-vis short-term shareholder value maximization. Our findings suggest that while institutional ownership and stock-based executive compensation increase pay inequality, monitoring by the board of directors and higher stakes by the largest institutional investor constrain the CEO-employee pay ratio.

Institutional ownership and information transparency: Role of technology intensities and industries

Information disclosure is a necessary activity in corporate governance; information transparency plays a unique role in corporate governance in the era of knowledge-based economy. Lack of transparency can lead to confusion, misinformation, and distrust. With this in mind, we examine the factors that influence corporate information transparency in terms of two dimensions: technology intensity and institutional ownership. Drawing on data from a 2005–2012 cross-section sample of 1391 public firms evaluated by the official ‘information disclosure and transparency ranking system’ (IDTRS), we find that increases in domestic institutional ownership for firms in high-tech industries, relative to foreign institutional ownership, lead to a current-year upgrade in information transparency, but not for firms in other industries. We also find that firms with increased foreign institutional ownership and high-tech firms with both increased governmental institutional or corporate ownership and high R&D intensity can sustain a longer-run upgrade in corporate transparency. Pushing further we also investigate whether corporate transparency in high-tech industries is negatively affected if governmental institutional or corporate shareholders are involved in corporate governance, but cannot find strong evidence for such a tendency. Our results suggest that institutional shareholders promote good corporate governance practices which gradually improve at the pace of high technology development.

Shifts in Ownership Composition and Changes in the Implied Cost of Equity Capital for Dividend and Non-Dividend Stocks Following JGTRRA03

ABSTRACTPrior studies of the Jobs and Growth Tax Relief Reconciliation Act of 2003, which cut individual tax rates on both dividends and capital gains, unexpectedly find that non-dividend firms were more favorably affected by this legislation than dividend firms. We address this apparent inconsistency by extending prior research to account for significant shifts in institutional holdings for non-dividend stocks relative to dividend stocks following the tax change. These clientele shifts were especially concentrated among high-risk firms and provide a plausible explanation for the results reported in prior literature. Specifically, we find that significant increases in institutional ownership for high-risk firms led to larger reductions in the implied cost of equity capital compared to other firms that were more heavily favored by individuals following the reduction in shareholder tax rates.

Do Improvements in the Information Environment Enhance Insiders’ Ability to Learn from Outsiders?

ABSTRACTWe examine whether and how an exogenous shock to the information environment changes insiders’ ability to learn from outsiders. We document three main findings. First, we find an increase in investment‐to‐price sensitivity following the adoption of International Financial Reporting Standards (IFRS). Second, we show that the relation between the market reaction to M&A deal announcements and the likelihood of deal completion becomes stronger after IFRS adoption. Third, we find significant improvements in post‐acquisition operating and stock return performance post‐IFRS adoption. These results are more pronounced for firms that experienced significant increases in foreign institutional ownership around IFRS adoption, especially when these foreign investors are from countries that matter for the firm’s growth opportunities. Taken together, our findings suggest that insiders’ ability to learn from outsiders improves post‐IFRS, and this improved ability to learn from outsiders leads to real economic gains.

The role of institutional investors and individual investors in financial markets: Evidence from closed-end funds

I use closed-end funds as a unique research tool to explore whether institutional investors are a stabilizing or a destabilizing force in financial markets. If institutional investors stabilize the market by trading against mispricing, then they should purchase closed-end funds selling at a wide discount and sell funds selling at a large premium. Consistent with the market-stabilizer hypothesis, I document that wide-discount funds experience a higher subsequent institutional demand than premium funds do. Moreover, my findings that an increase in institutional ownership forecasts a decrease in the volatility of discount returns support the proposition that institutional trading reduces noise trader risk. In sum, the results suggest that institutional investors play a price-stabilizing role in financial markets.