Abstract This paper examines whether institutional investors exhibit preferences for near‐term earnings over long‐run value and whether such preferences have implications for firms' stock prices. First, I find that the level of ownership by institutions with short investment horizons (e.g., “transient” institutions) and by institutions held to stringent fiduciary standards (e.g., banks) is positively (negatively) associated with the amount of firm value in expected nearterm (long‐term) earnings. This evidence raises the question of whether such institutions myopically price firms, overweighting short‐term earnings potential and underweighting long‐term earnings potential. Evidence of such myopic pricing would establish a link through which institutional investors could pressure managers into a short‐term focus. The results provide no evidence that high levels of ownership by banks translate into myopic mispricing. However, high levels of transient ownership are associated with an over‐ (under‐) weighting of near‐term (long‐term) expected earnings, and a trading strategy based on this finding generates significant abnormal returns. This finding supports the concerns that many corporate managers have about the adverse effects of an ownership base dominated by short‐term‐focused institutional investors.

Abstract This paper examines whether institutional investors create or reduce incentives for corporate managers to reduce investment in research and development (R&D) to meet short-term earnings goats. Many critics argue that the frequent trading and short-term focus of institutional investors encourages managers to engage in such myopic investment behavior Others argue that the large stockholdings and sophistication of institutions allow managers to focus on long-term value rather than on short-term earnings. I examine these competing views by testing whether institutional ownership affects R&D spending for firms that could reverse a decline in earnings with a reduction in R&D. The results indicate that managers are less likely to cut R&D to reverse an earnings decline when institutional ownership is high, implying that institutions are sophisticated investors who typically serve a monitoring role in reducing pressures for myopic behavior However, I find that a large proportion of ownership by institutions that have high portfolio turnover arid engage in momentum trading significantly increases the probability that managers reduce R&D to reverse an earnings decline. These results indicate that high turnover and momentum trading by institutional investors encourages myopic investment behavior when such institutional investors have extremely high levels of ownership in a firm; otherwise, institutional ownership serves to reduce pressures on managers for myopic investment behavior.

ABSTRACT Recent work suggests that institutional investors execute profitable trades based on private information about earnings and returns. We provide new evidence on the prevalence and sources of such informed trading by (1) testing for the creation and liquidation of positions based on private information, (2) introducing private information proxies that reflect the size and nature of an institution's position in each portfolio firm, and (3) using a methodology that examines multiple investor characteristics simultaneously at the institution‐firm level. We find that changes in ownership by institutions with large positions in a firm are consistent with informed trading. However, other previously documented proxies for private information produce results more consistent with risk‐based trading (e.g., investment style) or insignificant in the presence of other proxies (e.g., fiduciary type). We also find that informed trading is more prevalent in small firms and when the large positions are taken by investment advisers and large institutions.

Brian J. Bushee, Christopher F. Noe, Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility, Journal of Accounting Research, Vol. 38, Supplement: Studies on Accounting Information and the Economics of the Firm (2000), pp. 171-202

This paper examines the economic consequences of a regulatory change mandating OTCBB firms to comply with reporting requirements under the 1934 Securities Exchange Act. This change substantially increases mandated disclosures for firms previously not filing with the SEC. We document that the imposition of disclosure requirements results in significant costs for smaller firms, forcing them off the OTCBB. SEC regulation also has significant benefits. Firms previously filing with the SEC experience positive stock returns and permanent increases in liquidity, suggesting positive externalities from disclosure regulation. Newly Compliant firms exhibit significant increases in liquidity consistent with improved disclosure reducing information asymmetry.

Abstract We examine whether the application of fundamental analysis can yield significant abnormal returns. Using a collection of signals that reflect traditional rules of fundamental analysis related to contemporaneous changes in inventories, accounts receivables, gross margins, selling expenses, capital expenditures, effective tax rates, inventory methods, audit qualifications, and labor force sales productivity, we form portfolios that earn an average 12- month cumulative size-adjusted abnormal return of 13.2 percent. We find evidence that the fundamental signals provide information about future returns that is associated with future earnings news. Moreover, a significant portion of the abnormal returns is generated around subsequent earnings announcements. These findings are consistent with the underlying focus of fundamental analysis on the prediction of earnings. Significant abnormal returns to the fundamental strategy are not earned after the end of one year of return cumulation, indicating little support for the idea that the signals capture information about multiple-year-ahead earnings not immediately impounded in price or about long-term shifts in firm risk. Additional analysis on a holdout sample suggests that the strategy continues to generate abnormal returns in a period subsequent to the introduction of the fundamental signals in the literature, and contextual analyses indicate that the strategy performs better for certain types of firms (e.g., firms with prior bad news).

ABSTRACT This paper provides evidence that financial reporting quality (FRQ) influences the holding costs of trading strategies. While prior research has focused on the benefits of investment strategies based on poor FRQ (i.e., larger returns due to a greater amount of private information), we examine whether poor FRQ imposes greater holding costs on certain trading strategies. We show that poor FRQ motivates sophisticated investors with short-term horizons to tilt their portfolios away from value stocks, whose returns are contingent on investors revising their beliefs about firm fundamental value, and toward past winner stocks, whose future returns are realized more quickly. Poor FRQ also increases the length of time that institutions maintain large positions in value stocks. Our results imply that mis-valuations can be persistent when arbitrageurs perceive high holding costs from poor financial quality, even when they can see through the opaque financial disclosures.

ABSTRACT We examine the actions and outcomes of investor relations (IR) programs in smaller, less-visible firms. Through interviews with IR professionals, we learn that IR strategies have a common goal of attracting institutional investors and that direct access to management, rather than increased disclosure, is viewed as the key driver of the strategy's success. We test for the effects of IR programs by examining small-cap companies that hired IR firms in a differences-in-differences research design with controls for changes in disclosure and determinants of the decision to initiate IR. Relative to a matched sample of control firms, we find that companies initiating IR programs exhibit greater increases in institutional investor ownership and a shift toward investors that normally would not follow the companies. We also find greater improvements in analyst following, media coverage, and the book-to-price ratio. Our results indicate that IR activities successfully improve visibility, investor following, and market value. Data Availability: All analyses are based on publicly available data.

We use corporate jet flight patterns to identify private meetings with investors that are ex ante unobservable to non-participants. Using approximately 400,000 flights, we proxy for private meetings with “roadshows,” defined as three-day windows that include flights to money centers and to non-money centers in which the firm has high institutional ownership. Roadshows exhibit greater abnormal stock reactions, analyst forecast activity, and absolute changes in local institutional ownership than other flight activity. We also find positive trading gains in firms with more complex information and infrequent private meetings, suggesting that roadshows provide participating investors an advantage over non-participating investors.