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Is a firm that is known for positively engaging stakeholders expected to voluntarily disclose bad financial news? If it makes the announcement, does its corporate goodness help to mitigate the stock price reaction? We examine these issues using a sample of profit warnings, and a sample of firms with negative earnings surprises that did not warn. Firms that have positive corporate social responsibility ratings are more likely to provide earnings warnings than other firms. When they do provide a profit warning, the event negative abnormal returns are of significantly smaller magnitude than the returns of other firms providing warnings. This effect does not occur for social firms that decide not to warn. They suffer the same negative stock price impact on the earnings announcement day as other firms.

We test whether bank competition affects firms’ leverage adjustment speeds. Using Chinese data where bank concentration varies across both years and provinces, we find that under-levered firms move to their target leverage faster when bank competition is high. Tests surrounding an exogenous shock to bank competition lead to the same conclusion. We also find that small firms and nonstate-owned firms exhibit faster leverage adjustments when bank competition is high, which is consistent with the conjecture that bank risk taking increases with competition. This article is protected by copyright. All rights reserved

We examine the market reaction of profit warnings (PWs) over the business cycle in the U.S. during 1995–2012. The average PW is associated with a −13.38% abnormal return during the announcement day. This is substantially higher than the abnormal return of firms who announce a negative earnings surprise without previously warning about it. We also find that the PW stock market reactions are asymmetric during the business cycle. Negative stock market reactions are greater in magnitude during expansion periods than during contraction periods. Theory suggests that this is because bad news is not expected during good times, so when it is announced, investors have a greater update to their beliefs.

We examine the market price and liquidity reaction to 239 share repurchase announcements in India. The average abnormal return on announcement day is 2.07 percent. Firms with larger promotor ownership stakes experience higher market reactions. Using the Amihud illiquidity measure and volume, we show that liquidity improves after the announcement. Open market repurchase programs increase market liquidity while tender offers do not. Liquidity improves more for high promotor ownership firms. Lastly, shorter duration repurchase programs improve liquidity more than longer duration programs. These results are consistent with our discussion of the pecking order of ownership structure in the low information transparency environment of India.

Family involvement as chair of the board combines the reputation of the controlling family and the firm. Thus, the family's incentive to prevent reputation loss acts as a corporate governance mechanism in mitigating self-serving and bad news hoarding behavior of family firms. We find a lower future stock price crash risk in family firms with family related chairman, compared with family firms with non-family related chairman. The impact of family related chairman is more pronounced in firms with weaker external monitoring and more severe financial distress, and when families have greater reputation concern. Additionally, we find family-chair firms conduct more bad news forecasting, less tunneling behavior, higher earnings quality, as well as have lower costs of equity and overall better performance in the future. The family CEO has little impact on future stock price crash risk.

Compared to matched conventional mutual funds, socially responsible mutual funds outperform during periods of market crises. This dampening of downside risk comes at the cost of underperforming during non-crisis periods. Investors seeking downside protection would value the asymmetry of these returns. This asymmetric return pattern is driven by the mutual funds that focus on environmental, social, or governance (ESG) attributes and is especially pronounced in ESG funds that use positive screening techniques. Furthermore, the observed patterns are attributed to the funds’ socially responsible attributes and not the differences in fund portfolio management or the characteristics of the companies in fund portfolios.

Consistent with the predictions of Brennan and Thakor's (1990) model of shareholder preferences, we find that, on average, institutional shareholders are net sellers during share repurchases. After controlling for liquidity provision and characteristics investing, we find that a one standard deviation increase in share repurchases during a given quarter is associated with a 0.11 standard deviation decrease in institutional investor demand. We estimate that 37% of the inverse relation is attributed to institutional investors executing liquidity provision strategies, 8% is explained by institutions reacting to the investment characteristics signaled by a repurchasing firm. We attribute the majority, 55%, to the information asymmetry between institutions and individual investors. This work is one of the first to exploit the SEC mandate requiring firms to report the actual number of shares they repurchase each quarter, beginning in 2004. Using actual number of shares repurchased, we find evidence of institutional investors increasing their selling as firms increase their repurchasing. This finding is robust to models of endogeneity and autocorrelation in share repurchases and institutional investor trading.

Faccio et al. (2001) find that when East Asian firms have multiple large shareholders, they will collude to expropriate wealth and withhold dividend payouts. However, when it becomes difficult for large shareholders to expropriate wealth through activities like tunneling, large shareholders may then need dividends to fund personal cash flow needs. Thus, they may cooperate to make firms pay dividends and pay large dividends. To test this hypothesis, we study Chinese-listed firms. Consistent with our contention, we find that firms with multiple large shareholders are more likely to pay dividends and pay large dividends. These activities are especially prevalent after restrictions were placed on tunneling. We also find that dividend payouts and large payouts are more likely when the largest shareholder needs the cooperation of other blockholders to exert control over dividend payout policy, and when multiple blockholders are of the same identity.

Japan's most powerful known earthquake struck at 2:46 p.m. on Friday, March 11, 2011. We study the unusual trading behaviors of individual and foreign investors in Japan during the aftermath of this natural disaster. Individual investors typically show contrarian trading patterns, so the sharp downturn in the Nikkei should cause positive net purchases. Instead, purchases were significantly less than sales in the week after the earthquake. Foreign investors typically show positive feedback and momentum trading patterns. However, in the week after the earthquake, they seemed to have stabilized the Japanese stock markets by dramatically increasing their trading activity and net purchases.

When determining a stock to buy, Strahilevitz et al. (2011) demonstrate that individual investors often repurchase a stock previously traded for a profit as a learning process. When evaluating a decision, people use the most available information that comes to mind. We posit that the most recently sold stocks are the most salient. Our analysis reveals that the presence of another more recently sold stock decreases a household’s propensity to repurchase a different stock by 23%. This recency effect dominates the impact of prior profitability on the repurchasing decision. The repurchase activity of investors appears to be sub-optimal, partially due to commission costs and under-diversification of portfolios, which is magnified for households repurchasing at higher frequencies. More sophisticated investors demonstrate less of this behavior.

Using brokerage account data from China, we study investment decision making in an emerging market. We find that Chinese investors make poor trading decisions: the stocks they purchase underperform those they sell. We also find that Chinese investors suffer from three behavioral biases: (i) they tend to sell stocks that have appreciated in price, but not those that have depreciated in price, consistent with a disposition effect, acknowledging gains but not losses; (ii) they seem overconfident; and (iii) they appear to believe that past returns are indicative of future returns (a representativeness bias). In comparisons to prior findings, Chinese investors seem more overconfident than U.S. investors (i.e., the Chinese hold fewer stocks, yet trade very often) and their disposition effect appears stronger. Finally, we categorize Chinese investors based on proxy measures of experience and find that “experienced” investors are not always less prone to behavioral biases than are “inexperienced” ones. Copyright © 2007 John Wiley & Sons, Ltd.

We examine the operating performance of Thai firms after they go public. Overall, we find that their performance declines. We then explore the relationship between managerial ownership and the change in firm performance. We find that firms with ‘low’ and ‘high’ levels of managerial ownership experience positive relationships between managerial ownership and the change in performance (alignment-of-interest hypothesis), while firms with ‘intermediate’ levels of managerial ownership exhibit a negative relationship between managerial ownership and the change in performance (entrenchment hypothesis). Examining the operating performance of IPO firms from an emerging market and finding a curvilinear relationship between managerial ownership and the post-IPO change in performance represents two significant contributions to the IPO literature.

Using weekly aggregate investment flow from Japan, we study the investment patterns and performance of foreign investors, individual investors, and five types of institutional investors. Securities firms, banks, and foreign investors perform well over the sample period. Individual investors perform poorly. We also find that foreign investor trading is associated with positive feedback market timing and that this trading earns high returns. Alternatively, individual investors use positive feedback trading in their market timing but earn low returns. Consequently, we document evidence consistent with information-based models (foreign investors) and behavioral-based models (individual investors). It is a particularly new and interesting finding that evidence of both information-based trading and behavioral-based trading occurs in the same market.

We find positive and significant wealth transfers from individuals to institutions following a share repurchase. It appears that institutional investors are informed shareholders that use share repurchases as an opportunity to magnify the effect of their informational advantage over individual investors. On average, we find wealth transfers from individuals to institutions in the amount of $910 million, over the year following a share repurchase. In the largest stocks, we estimate wealth transfers to institutions as large as $2.7 billion over the five years following a share repurchase. The firm’s share repurchase activity partially obscures the impact of the institutional trading and the ultimate change in ownership. This result is robust to an array of alternative methodologies. We find that institutions usually own a larger portion of the firm, relative to individuals, after a repurchase, even when they are net sellers. They simply sell less than individual investors. Thus, using net changes in ownership as a proxy for relative institutional investor demand can lead to false inference as to the relative informational advantage of institutional investors in quarters with significant repurchasing activity.

Purpose – The purpose of this paper is to explore some commonly held beliefs about individuals investing in over-the-counter (OTC) stocks (those traded on Over-the-counter Bulletin Board (OTCBB) and Pink Sheets), a fairly pervasive activity. The authors frame the analysis within the context of direct gambling, aspirational preferences in behavioral portfolios, and private information. Design/methodology/approach – Contrary to popular perceptions, the modeling of the deliberate act of buying OTC stocks at a discount brokerage house finds that unlike the typical lottery buyers/gamblers, OTC investors are older, wealthier, more experienced at investing, and display greater portfolio diversification than their non-OTC investing counterparts. Findings – Behavioral portfolio investors (Shefrin and Statman, 2000) invest their money in layers, each of which corresponds to an aspiration or goal. Consistent with sensation seeking and aspirations in behavioral portfolios, OTC investors also display higher trading activity. Penny stocks seem to have different characteristics and trading behavior than other OTC stocks priced over one dollar. Irrespective of the price of OTC stocks, the authors find little evidence of information content in OTC trades. Originality/value – The paper provides insight into individual investor decision making by empirically exploring the demographic and portfolio characteristics of individuals trading in OTC stocks.

I describe household behavior in boom and bust economic cycles with a particular focus on the recent financial crisis. The behaviors are motivated by cognitive limitations and psychological bias. In addition, household behavior exacerbates the boom/bust economic cycle. In boom times, households’ extrapolation bias and groupthink lead to chasing and extending asset bubbles (like tech stocks and real estate). Changing social norms foster the use of debt, which spurred the economy and eventually overburdened households. In bust times, the biases and fear lead to selling previously popular assets at low prices. The social norms regarding bankruptcy change to reduce the stigma of default. Households then repay debt and save more, which drags on an already slow economy. In addition, households influence businesses and governments into actions that also exacerbate the cycle. In boom times, predatory lenders preyed on cognitive limitations and biases of subprime borrowers to sell them high cost mortgages that they would not be able to repay. During the boom times, household attention is not focused on financial regulation. This is when business influences the political process and laws are enacted to loosen market regulation. These changes may extend the boom period into bubble territory. During bust times, public outcry influences politicians to tighten business regulation, likely inhibiting the economic rebound. Thus, economic boom/bust cycles are largely fed by household behavior.