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We examine whether and how options trading activity curtails real activities manipulation. Using a large sample of U.S. firms suspected of earnings manipulation, we document that an active options trading market significantly reduces real activities manipulation. We confirm our findings by using 2SLS analyses and alternative research designs. Our findings are also robust to using alternative proxies for options trading activity. Further, we find that the deterring impact of options trading on real activities manipulation is more pronounced among firms with low institutional ownership, among firms in highly competitive industries, and among small and young firms. Overall, our findings show that an active options market discourages managers from engaging in real activities manipulation, as informed options trading helps stock prices better reflect adverse consequences of real activities manipulation. Our findings highlight the benefits of options market development in reducing value-destroying activities and thus provide policy, practice, and research implications. [ABSTRACT FROM AUTHOR]

Institutional owners frequently invest in a diversified portfolio of firms to avoid firm-specific risks. I investigate the particular scenario in which the institutional owners have shares in both the acquiring and the acquired target firms of an M&A deal. Using a quasi-experimental approach, I find that the acquirer pays less premium and performs better after the M&A effectiveness when the ratio between the value owned by common institutional shareholders in the acquirer and the value held by the same shareholders in the target firm is higher. The value paid is higher, and the performance worsens when this ratio is lower. The results suggest the common institutional owners can obtain benefits from promoting and implementing such M&A deals as a secondary compensation for their lack of control, usually at the expense of the controlling shareholders. [ABSTRACT FROM AUTHOR]

I ask whether corporate communication programs influence shareholder base retention. I use spin-offs to study the communication programs of the spun-off business units that inherit their parent firms' shareholders. Unit firms that initiate a communication program maintain higher levels of post-spin-off institutional ownership and retain more of the inherited institutional shareholder base than firms that do not communicate. An important benefit of communication is that these firms avoid the stock price pressure commonly experienced by unit firms following a sell-off by the inherited institutional shareholder base. This paper extends our understanding of the role of communication in retaining institutional shareholders. [ABSTRACT FROM AUTHOR]

Nonfinancial disclosures of product and business expansion planning occur frequently in practice and are an important vehicle by which managers convey corporate information to outsiders. However, little is known about how the opportunistic incentives of managers affect the choice of such nonfinancial disclosures. This study examines whether managers make their nonfinancial disclosures strategically for self-serving trading incentives. I find strong and robust evidence to suggest that managers manipulate the timing and selectivity of their nonfinancial disclosures in an attempt to maximize trading profits. Specifically, managers tend to disclose bad (good) news on products or business expansion before purchasing (selling) shares. I also find that such strategic behavior is more evident when the expected price impact of the disclosures is greater and when the CEOs are more powerful. However, I do not find evidence that the strategic behavior is weaker for firms with high institutional stock ownership. Overall, my results contribute to understanding managers' strategic use of nonfinancial disclosures in fulfilling personal trading incentives, and should be of interest to boards of directors charged with the responsibility of monitoring and restricting opportunistic managerial disclosures and insider trades. [ABSTRACT FROM AUTHOR]

This work investigates the relationships between institutional ownership, board diversity, and corporate innovation in US-listed firms. Institutional investors play a crucial role in a firm's operation and exert considerable influence on the efficient monitoring of innovative investment. Theory predicts that institutional ownership has a positive effect on innovation investment. However, we find that active institutional investors drove this positive relationship. For those passive institutional investors, this impact is negative. However, a banker on the board can change the effect from negative to positive for passive institutional investors. Firms with female directors, a high presence of audit committee, or a large proportion of ethnic minority directors on board have a significant and positive impact on innovation, including R&D investments and the number of patents. The enactment of Sarbanes–Oxley Act (SOX) in 2002 made information more transparent to investors and narrowed the gap between active and passive institutional investors on innovation. The findings are robust to addressing endogeneity concerns and causal relationships using the IV-2SLS, Difference-in-Differences approaches, and alternative methodology. [ABSTRACT FROM AUTHOR]

The current study examines the association between earnings quality (EQ) and investment efficiency (IE) using the conditional effect of legal origin. Further, we assess the influence of the institutional ownership (IOW) on the relationship between EQ and IE within different legal environments, using a sample of 22,446 firm-year observations from the US, the UK, Germany and Japan over the period of 2001–2018. In general, the results provide cross-country evidence that a higher EQ enhances IE. Further, the results indicate that higher EQ can mitigate overinvestment and underinvestment problems by ensuring that firms move toward their optimal level of investment. In addition, the findings reveal that a country's legal environment affects IE with EQ having a stronger association with IE in common law countries as compared to code law economies. In terms of the conditional role of IOW, the findings illustrate that the effect of IOW on the relationship between EQ and IE varies within different legal origins. The results are robust to alternative measures for the main variables examined. This study provides policy implications for investors, managers, regulators, and theorists about the role of the institutional settings on the relation between certain properties of EQ and IE. [ABSTRACT FROM AUTHOR]

We examine whether a firm's voluntary disclosures, proxied by management earnings forecasts, affect its innovation activity. A firm making more disclosures generates fewer patents and lower-quantity patents. Enactment of SOX is applied as a natural experiment for an exogenous shock to voluntary disclosure. Corporate innovation is reduced for accelerated filers, especially after SOX becomes effective. Nondedicated institutional ownership, R&D spillover, and rival firms' innovation are higher for accelerated filers after SOX. There is more of a negative effect of voluntary disclosure on innovation activity when product markets are highly competitive, industry information diffusion is speedy, and disclosures are more informative. [ABSTRACT FROM AUTHOR]

Cross-owners, investors who have stakes in both the acquiring and target firms, are likely to focus on the total portfolio wealth effects from mergers and acquisition transactions, rather than the wealth effects of the target or bidder. Cross-owners may be less concerned with value destroying deals because their lack of gains, or even losses, as ownership in the acquiring firm can be offset by benefits derived from their ownership in the target firm. In contrast, shareholders with no cross-ownership, but own shares in either the target or the acquiring firm only, consider the value prospects for the target, thus producing heterogeneous incentives among shareholders to accept an offer. We investigate this heterogeneity within targets of 481 US negative premium deals and find substantial heterogeneity in acquisition incentives within the target firm shareholder base. Target shareholders in negative premium acquisitions experience negative wealth effects, but institutional cross-owners of negative acquisition premium deals realize positive wealth effects. We also find strong evidence of a size effect, where the observed wealth effects are amplified in larger deals. The divergent interests within the target shareholder base, with the attendant heterogeneous incentives to support deals, limits the monitoring capacity of institutional owners in negative premium deals. [ABSTRACT FROM AUTHOR]

We find evidence that a firm's record earnings influence market response to earnings news. Our results show that the proximity of the firm's earnings to its record earnings leads to investors' underreaction following earnings announcements, exacerbating post-earnings-announcement drift. Such biased behavior is more pronounced in low-growth firms and firms with low institutional ownership. Meanwhile, analysts are not subject to this anchoring bias when a firm's earnings are close to its record earnings. Overall, we find that a firm's record earnings play an important role as an anchor when market participants evaluate the firm's earnings news. [ABSTRACT FROM AUTHOR]

Building on the premises that institutional ownerships vary in their impact on corporate social responsibility (CSR) decisions and that geographic proximity facilitates the valuation of benefits from CSR, we hypothesize that local long-term institutional ownership is a driver for corporate social performance, in particular positive CSR (CSR strengths). Using a panel data of S&P 500 firms over a 15-year window, we show that long-term institutional ownership that varies in geographic proximity to the focal firm does have a heterogeneous impact on CSR. Whereas both local and non-local long-term institutional ownership has a similar negative effect on CSR concerns, only local long-term institutional ownership has a positive effect on CSR strengths. The positive relation between local long-term institutional ownership and CSR is stronger in firms that are more involved in dealing with soft information which is difficult to quantify from a distance, such as those with high levels of research and development and intangible assets. [ABSTRACT FROM AUTHOR]

We investigate how a firm's decision to hold excessive cash or to overinvest could influence its dividend payout policy in Indonesia. Additionally, we examine the association between corporate ownership structure and cash dividends. Using a data set of Indonesian listed firms for the period from 1995 to 2014, we find that excessive cash holding (overinvestment) positively (negatively) affects a firm's likelihood of paying dividends. Also, we find that family, foreign, state and institutional ownership have significantly negative links with dividends, which suggests the signals of expropriation of firms' wealth by major shareholders. These findings strongly support the expropriation hypothesis that commonly applies to firms with higher level of concentration or to firms in a weak legal environment by which the rights of minority interests are put at risk by large shareholders. [ABSTRACT FROM AUTHOR]

This study investigates how foreign institutional ownership interacts with accounting conservatism in an emerging market setting. We posit that weak investor protection and a high degree of information asymmetry between insiders and outside investors increase demand for conservative reporting in firms operating in emerging markets. Foreign investors in this setting have informational disadvantages relative to their domestic peers and have difficulties in getting access to data. Using a sample of Turkish firms, we find that foreign institutions (particularly foreign corporate investors) demand more conservative reporting in the investee firms. Moreover, we show that this association is more pronounced among firms with greater asymmetric information problems and growth opportunities. Our additional tests reveal that the direction of causality flows from foreign institutional ownership to conservatism, and not vice versa. [ABSTRACT FROM AUTHOR]

Using 13F filings from 1996 to 2011, we document that hedge fund holdings are negatively associated with the subsequent frequency of portfolio firms' voluntary disclosure. This is opposite to the positive association documented in earlier studies for overall institutional ownership as well as for non-hedge fund ownership in our sample. The negative association is more pronounced for hedge fund ownership with short-term investment horizons. Tests using measures of hedge fund influence suggest that hedge fund ownership impacts voluntary disclosure as opposed to hedge funds selecting stocks with subsequent declines in disclosure. We also find that the stocks that decrease their voluntary disclosure subsequent to increases in hedge fund holdings earn positive abnormal returns. Overall, our findings suggest that the impact of hedge funds on firm voluntary disclosure policy differs from that of other institutional investors and potentially contributes to hedge fund profitability. [ABSTRACT FROM AUTHOR]

We examine the relationship between institutional ownership stability and real earnings management. Our findings indicate that firms held by more stable institutional owners experience lower real activities manipulation by limiting overproduction. We further examine how the stability in the shareholdings of pressure-sensitive and insensitive institutional investors affect target firms' use of real earnings management, respectively. Unlike pressure-sensitive institutional investors, the stability in the share ownership of pressure-insensitive institutional investors (i.e., investment advisors, pension funds and endowments) mitigates target firms' use of real earnings management. Overall, our results are consistent with the view that institutional investors presence acts as a monitor on target firms' use of real earnings manipulation activities. [ABSTRACT FROM AUTHOR]

Using a sample of Chinese listed firms in the period from 2003 to 2012, this paper empirically investigates how the presence of politically connected directors affects stock price crash risk. We thereby make a distinction between listed state-controlled firms and privately controlled firms due to their different incentives to appoint politicians as directors on the board. Our empirical results show that politically connected directors exacerbate stock price crash risk in listed state-controlled firms, an effect driven by the appointment of local government officials as directors. In contrast, hiring politicians as directors, particularly central-government-affiliated directors, helps listed privately controlled firms to reduce stock price crash risk. Finally, good quality of institutions does not help to alleviate the positive relationship between political connections and stock price crash risk in listed state-controlled firms. However, it does weaken the role of political connections in reducing crash risk in listed privately controlled firms. [ABSTRACT FROM AUTHOR]

This study empirically investigates the association between institutional ownership composition and accounting conservatism. Transient (dedicated) institutional investors, holding diversified (concentrated) portfolios with high (low) portfolio turnover, focus on portfolio firms' short-term (long-term) perspectives and trade heavily (generally do not trade) on current earnings news. Thus, I predict that as transient (dedicated) institutional ownership increases, firms will exhibit a lower (higher) degree of accounting conservatism. Consistent with my predictions, in the context of asymmetric timeliness of earnings, I document that as the level of transient (dedicated) institutional ownership increases, earnings become less (more) asymmetrically timely in recognizing bad news. [ABSTRACT FROM AUTHOR]

This paper uses Taiwanese data to examine the impact of firm-level corporate governance mechanisms on firms' average cash holdings. Specifically, it examines how a firm's number of banking relationships and the percentages of managerial ownership and board ownership impact the firm's level of cash holdings. We document that higher percentages of managerial ownership and board ownership are associated with higher levels of corporate cash holding. Our results are consistent with the notion that managerial incentives and board monitoring are substitutes for each other. The substitution effect is especially pronounced when firms have poorly incentivized managers. We find that firms with a larger number of banking relationships are associated with lower levels of cash holdings. We find no evidence of a bank monitoring free rider problem. We also document a life-cycle effect in the drivers of cash holdings: there are substantial differences in the drivers of cash holdings for firms that have been in business for more than 5 years relative to those that have not been in business less than 5 years. [ABSTRACT FROM AUTHOR]

This paper examines the relationship between institutional ownership and executive compensation by taking into account the heterogeneity of institutional investors. The paper finds that ownership by transient institutional investors, who have short investment horizons and active trading, is positively related to the performance sensitivity of option grants for CEOs. However, no significant relationship holds for other types of institutions, including those dedicated institutional investors, who have longer horizon and concentrated holdings. Further tests suggest that the positive relationship between transient institutional ownership and the CEO pay-for-performance sensitivity is not driven by the trading behavior of transient institutional investors when stock performance is good. Instead, the paper documents preference of transient institutional investors for greater performance sensitivity of option grants for CEOs. After using an instrument approach to control for preference and endogeneity, transient institutional ownership is no longer significantly related to the CEO pay-for-performance sensitivity. Additionally, the paper does not find dedicated institutional investors serve a monitoring role in correcting overcompensation paid to CEOs. After controlling for preference and endogeneity, neither the level of salary nor the level of total direct compensation for CEOs is significantly related to dedicated institutional ownership. The findings suggest that on average the influence of institutional investors on CEO compensation occurs indirectly through their preference in line with their different investment types. [ABSTRACT FROM AUTHOR]