Large Institutional Ownership Research Articles

Do analysts’ earnings forecasts exclude earnings management? Evidence from audit adjustments

ABSTRACT Using audit adjustments to infer earnings management, we find that analysts’ earnings forecasts exclude a large amount of earnings management. The exclusion is greater for firms with larger institutional ownership and for firms with higher analyst following, where analysts have strong incentive to forecast economic earnings that are free of earnings management. Although auditors ultimately adjust the same earnings management from reported earnings, analysts are able to timely disseminate firms’ economic earnings to the market. Our study sheds light on analysts’ informational role in the capital markets and extends the boundary of the earnings management literature by investigating the earnings management adjusted by auditors instead of the earnings management remaining in reported earnings.

PROFITABILITAS, KEPEMILIKAN INSTITUSIONAL DAN NILAI PERUSAHAAN: DAMPAK PANDEMI COVID-19

This study aims to examine the Institutional Ownership, Profitability and Pandemic Covid-19 on Firm Value. The population of this study are companies listed on the Indonesia Stock Exchange (IDX) 2018 - 2020. The sample selection in this study uses purposive sampling to obtain samples that represent the predetermined criteria. This research is included in quantitative research – secondary data. This research uses balance panel regression in processing the data. The estimation method used in this study is the Fixed Effect Model (FEM). The research data is processed using E-Views 10. The results of this study indicate that institutional ownership has a significant negative effect on firm value with and without the Covid-19 variable involved. However, the profitability variable has a significant positive effect on firm value when the Covid-19 variable is not included. After the Covid-19 variable is included, profitability does not have a significant effect on firm value. The implication of this research is that individual investors and the stock market are more wary of companies that have large institutional ownership and Signaling Theory can explain phenomena and test the value of companies during the COVID-19 pandemic. Future research is expected to be able to separate the types of institutional ownership by type such as banks, foundations, brokers, etc. because each type of institutional investor has different characteristics. And further research can expand the observation period and consider other factors that affect firm value.

Faktor-faktor yang mempengaruhi corporate social responsibility dengan kinerja keuangan sebagai variabel moderasi pada perusahaan manufaktur yang terdaftar di Bursa Efek Indonesia

This study aims to analyze the factors that influence CSR with financial performance as a moderating variable in manufacturing companies listed on the IDX. The data used in this study is secondary data sourced from the annual reports and financial statements of manufacturing companies listed on the IDX during the 2015-2020 period. The research sample using purposive sampling method obtained a sample of 26 companies. The data analysis used is moderating regression analysis using Eviews 10. The results show that institutional ownership, managerial ownership and firm size have a positive and significant impact on CSR. Firm growth and debt ratio have no effect on CSR. Financial performance can moderate the direction of the positive relationship the influence of institutional ownership on CSR. Financial performance can moderate the direction of the negative relationship of managerial ownership on CSR. Financial performance cannot moderate the effect of firm growth on CSR. The results of this study provide information to management and investors where companies that have large institutional ownership can encourage CSR activities by paying attention to financial performance which can weaken the influence on CSR. Managerial ownership and large company size can encourage CSR activities by paying attention to financial performance which can strengthen the influence on CSR. In addition, improved financial performance and large institutional investors can encourage CSR activities. Declining financial performance and large managerial investors can also encourage CSR activities

Corporate social responsibility (CSR) performance and green innovation: Evidence from China

Green innovation is an important way for firms to achieve both economic benefits and environmental protection in the long term. We focus on the influence of corporate social responsibility (CSR) on firms’ green innovation. Using the CSR rating and green patent data in the Chinese market from 2008 to 2019, we find that CSR performance has a significant positive impact on firms’ green patent application and granted amount. Furthermore, this effect is stronger in firms with higher transparency and firms with larger institutional ownership.

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 terrorist attacks matter to dividend policy?

AbstractResearch Question/IssueMotivated by the importance of dividend policy in corporate finance as well as the rising frequency and severity of terrorism in society, this study aims to investigate whether and how dividend policy is influenced by terrorist attacks.Research Findings/InsightsUsing a comprehensive sample of terrorist attacks occurring in the United States between 1994 and 2015, we find that relative to firms located in safety areas (nonimpact firms), firms headquartered in terrorism‐affected areas (impact firms) are more likely to pay dividends and pay higher amount of cash dividends. We further find that the effect of terrorist attacks on dividends is driven by agency costs of free cash flow.Theoretical/Academic ImplicationsWe contribute to the literature by shedding light on how terrorism affects firms' dividend preferences. We highlight that uncertainty caused by terrorism heightens the need for dividend payouts in the presence of free cash flow. Our paper also adds to the existing literature by showing that better corporate governance quality as defined by a more independent board featuring CEO–chairman separation and greater presence of independent directors coupled with larger institutional ownership has a crucial role in mitigating the impact of terrorism on corporate payout policy.Practitioner/Policy ImplicationsPublic firms should regard dividend policy as a governance tool that reduces agency costs during times of uncertainty. The results of this study strengthen the idea that institutional investors can play a key role in corporate governance. As such, for investors, as far as agency costs are concerned, investments in firms that have a higher proportion of institutional holdings are sensible.

The Role of Large Institutional Ownership on Goodwill Impairment under the SFAS 142 Regime

This paper examines the effect of large institutional owners on accounting for goodwill and its resulting impairment charges. Economies of scale predict stronger incentives for large institutional owners to engage in monitoring. Employing a multivariate linear probability model on a sample of U.S. companies with goodwill on their balance sheets during the period from 2009 to 2019, I find that the likelihood of an impairment is more strongly related to an expected impairment when the share of equity held by the firm’s largest institutional owners is higher. Results prove to be economically meaningful and are generally robust to different specifications. This evidence is consistent with the active monitor hypothesis by large shareholders to protect their significant investments. Keywords: Goodwill accounting; goodwill impairment; institutional ownership; ownership concentration; monitoring; FASB; SFAS 142.

Tax Avoidance and Financial Statement Readability

This paper examines whether managers of firms that engage in high levels of tax avoidance (TA) strategically reduce their financial statement readability (FSR) to mitigate the risk of exposing their TA strategies. On average, results are inconclusive, but mainly hold in the sample of firms with low effective tax rates (i.e., high TA levels). Specifically, focused on firms with above-industry-median TA, the panel regression results show a negative relation between TA and FSR, and the difference-in-differences analysis, based on the ‘Check-the-Box’ regulation in 1997 that exogenously increases tax planning opportunities, suggests the negative impact of TA on FSR is likely causal. The relationship is stronger for firms faced with a greater likelihood of tax audit ex ante, firms in industries with a higher tax risk, and firms with a larger institutional ownership. The evidence adds to our understanding of the influence of corporate TA on financial disclosures.

Environmental Policy and Audit Pricing

This paper examines the effect of environmental policy stringency on audit pricing. Exploiting the exogenous variation in environmental policies across 26 countries, we find that firms in countries with more stringent environmental policies incur lower audit fees. The inverse association is more pronounced in common law countries, in countries with a higher level of public enforcement of regulations, and in countries with more protection of investors. The lower audit fees are also more prominent for firms followed by more analysts and firms with larger institutional ownership. Furthermore, we find that firms in countries with strong regulations are better and more innovative at managing environmental risk, which implies that better environmental performance of the firms following stronger regulations could lower the business risks and thus, decrease audit fees. Overall, our findings suggest that compliant firms benefit from environmental policy stringency.

Differences in CEO compensation under large and small institutional ownership

AbstractI examine the influence of large and small institutional investors on different components of chief executive officer (CEO) compensation, using US data for 2006–2015. An increase in large institutional ownership reduces total pay and current incentive compensation (i.e., options, stocks, bonus pay), whereas small institutional investors lower long‐term incentive pay (i.e., pension, deferred pay, stock incentive pay). These findings are consistent with managerial agency theory and the substitution of incentive pay by institutional monitoring. The effects are stronger for higher ownership levels and firms with weak governance, less financial distress, long‐tenured CEOs, multiple segments, and more free cash flow.

ANALISIS PENGARUH CORPORATE GOVERNANCE TERHADAP HUBUNGAN INVESTMENT OPPORTUNITY SET DAN NILAI PERUSAHAAN PADA PERUSAHAAN INDUSTRI MANUFAKTUR YANG TERCATAT DI BURSA EFEK INDONESIA

This study aims to examine the effect of corporate governance negative investment opportunity set (IOS) on firm value. By using a sample of 235 samples obtained from 47 manufacturing companies listed on the Indonesia stock exchange during the 2009-2013 observation period, this study proves that the investment opportunity set (IOS) has a positive and significant effect on firm value (hypothesis 1 is rejected); the supervisory function carried out by independent commissioners is able to reduce the opportunistic behavior of managers in making investments (hypothesis 2 is accepted); there is a positive and significant value for the interaction coefficient of investment opportunity set (IOS) with institutional ownership (hypothesis 3 is accepted). This means that large institutional ownership in the company will have a good influence on management in allocating funds that are trusted by investors; coefficient of interaction of investment opportunity set (IOS) with managerial ownership is positive but not significant (hypothesis 4 is rejected). Managerial ownership does not have a significant effect on increasing company value. The coefficient of determination of the results of this test is 0.589, this means that the investment opportunity set (IOS), Independent Commissioner, Institutional Ownership, Managerial Ownership are able to explain the Corporate Value of 58.9%. In other words, other factors outside of this research model that influence the Company Value by 41.1%.

Patent Disclosure and Price Discovery

We focus in this study on the exogenous event of the enactment of American Inventor’s Protection Act of 1999 (AIPA), which disseminates timely, detailed, and credible public information on R&D activities through pre-grant patent disclosures. Exploiting the staggered timing of patent disclosures, we identify a significant improvement in the efficiency of stock price discovery. This improvement is stronger when patent disclosures reveal firms’ successful, new, or technologically valuable inventions. This improvement is more pronounced for firms in high-tech or fast-moving industries, or with a large institutional ownership or analyst coverage. We also find stock liquidity rises and investors’ risk perception of R&D drops after the enactment of AIPA. Our results highlight the importance of timely, detailed, and credible disclosures of R&D activities in alleviating the information problems faced by R&D-intensive firms.

Does It Pay to Not Write Well? The Case of Tax Avoiders

This paper examines whether managers of firms that engage in high levels of tax avoidance (TA) strategically reduce their financial statement readability (FSR) to mitigate the risk of exposing their TA strategies. On average, results are inconclusive, but mainly hold in the sample of firms with low effective tax rates (i.e., high TA levels). Specifically, focused on firms with above-industry-median TA, the panel regression results show a negative relation between TA and FSR, and the difference-in-differences analysis, based on the “Check-the-Box” regulation in 1997 that exogenously increases tax planning opportunities, suggests the negative impact of TA on FSR is likely causal. The relationship is stronger for firms faced with a greater likelihood of tax audit ex ante, firms in industries with a higher tax risk, and firms with a larger institutional ownership. The evidence adds to our understanding of the influence of corporate TA on financial disclosures.

When Cutting Dividends is Not Bad News: The Case of Optional Stock Dividends

We provide evidence on optional stock dividends, a mechanism that allows shareholders to choose between stock dividends and cash dividends. We find that, in contrast to dividend cuts, shareholders do not view this option as bad news. They overwhelmingly approve it at general meetings, with the majority favoring stock dividends over cash dividends. We find that large firms with limited cash holdings and a large institutional ownership are more likely to offer optional stock dividends to their shareholders. These firms are the most committed to paying dividends, and this option provides them financial flexibility by allowing temporary cuts in cash outflows without altering their nominal dividend policy.

The Granular Nature of Large Institutional Investors

Over the last four decades, the concentration of institutional assets in equity markets has increased dramatically. We conjecture that large institutions are granular, that is, they cannot be reduced to a collection of smaller independent entities. Hence, the paper studies whether large institutional ownership has a significant impact on asset prices. We provide evidence of a causal effect of ownership by large institutions on the volatility of their stock holdings. As a potential channel for this effect, we show that large institutions generate higher price impact than smaller institutions. Their trades are larger and concentrated on fewer stocks than those of smaller firms. Moreover, the investor flows to units within the same family are more correlated than the flows to independent entities. Finally, the effect of large institutions on volatility is unlikely to be related to improved price discovery, because the stocks owned by large institutions exhibit stronger price inefficiency.

Performance-Vesting Provisions in Executive Compensation

The usage of performance vesting (p-v) equity awards to top executives in large US companies has grown from 20 to 70 percent from 1998 to 2012. We assess the implications of these increasingly complex awards by examining the accuracy of and biases in disclosure and the connection between the structure of executive pay, risk-taking incentives, and firm risk. To do so, we develop and implement new methods that empirically quantify the significant effects of p-v provisions on the value, delta, and vega of equity-based compensation. We find large biases in the value of executive compensation reported in company disclosures. The elasticity of reported value in economic value is far less than one, with additional bias downward (upward) for large institutional ownership (when the firm uses a high-market-share compensation consultant). Our analysis empirically reaffirms the presence of a causal relation in both the time series and cross section between compensation convexity and firm risk.

Who Cares about Auditor Reputation?*

AbstractI provide evidence on the demand for auditor reputation by examining the defections of Arthur Andersen LLP's clients following the accounting scandals and criminal conviction marring the auditor's reputation in 2002. About 95 percent of clients in my sample did not switch auditors until after Andersen was indicted for criminal misconduct regarding its failed audit of Enron Corp. I test whether the timing of client defections and the choice of a new auditor are consistent with managers' incentives to mitigate potentially costly information and agency problems. I find that clients defected sooner, mostly to another Big 5 auditor, if they were more visible in the capital markets; such clients attracted more analysts and press coverage, had larger institutional ownership and share turnover, and raised more cash in recent security issues. However, my proxies for agency conflicts — managerial ownership and financial leverage — are not associated with the timing of defections or the choice of new auditor. Overall, my study suggests that firms more visible in the capital markets tend to be more concerned about engaging highly reputable auditors, consistent with such firms trying to build and preserve their own reputations for credible financial reporting.

Corporate Governance, Strategy and Survival in a Declining Industry: A Study of UK Cotton Textile Companies*

ABSTRACT Building on the strategic flexibility perspective, this paper examines the influences of organizational diversity, ownership structure and board characteristics on strategic responses to industrial decline in firms from the UK textile industry. Using samples of exiting and surviving companies it shows that, in line with the predictions of the strategic flexibility framework, the surviving companies tended to have a higher level of organizational diversity. They also tended to have larger institutional ownership and more diverse boards. These factors are associated with higher investment, financial performance, and growth. The results are consistent with the resource and service roles of the corporate governance factors.

Who Cares about Auditor Reputation?

I provide evidence on the demand for auditor reputation by examining the defections of Arthur Andersen LLP's clients following the accounting scandals and criminal conviction marring the auditor's reputation in 2002. About 95 percent of clients in my sample did not switch auditors until after Andersen was indicted for criminal misconduct regarding its failed audit of Enron Corp. I test whether the timing of client defections and the choice of a new auditor are consistent with managers' incentives to mitigate potentially costly information and agency problems. I find that clients defected sooner, mostly to another Big 5 auditor, if they were more visible in the capital markets; such clients attracted more analysts and press coverage, had larger institutional ownership and share turnover, and raised more cash in recent security issues. However, my proxies for agency conflicts - managerial ownership and financial leverage - are not associated with the timing of defections or the choice of new auditor. Overall, my study suggests that firms more visible in the capital markets tend to be more concerned about engaging highly reputable auditors, consistent with such firms trying to build and preserve their own reputations for credible financial reporting.

The Influence of Long-Term Performance Plans on Earnings Management and Firm Performance

Boards of directors often implement long-term performance plans (LTPP) to focus management's attention on enhancing long-term shareholder value instead of concentrating their efforts on short-term earnings. This study provides estimation results suggesting that firms that compensate managers with LTPP are associated with lower levels of managed earnings than firms that have only short-term bonus plans. In addition, we find evidence that suggests that firms with long-term performance plans have significantly higher annual returns than firms that have only short-term bonus plans. We also find that firms with long-term performance plans are typically larger firms with smaller managerial ownership and larger institutional ownership than firms without long-term performance plans.