In this study, we identify the relation between foreign institutional ownership and stock liquidity commonality in 39 countries from 2000 to 2014. Our results show a negative and robust linkage between foreign institutional ownership and global stock liquidity commonality. Corporate transparency is a key mechanism through which foreign institutional investors can reduce stock liquidity commonality. Independent and U.S.-based foreign institutional investors have a greater effect on reducing stock liquidity commonality. Additionally, there is a U-shaped relation between foreign institutional ownership and stock liquidity commonality. Next, we provide evidence that foreign institutional investors mitigate the effects of local culture, exaggerate the impacts of economic policy uncertainty, and substitute the role of a country's corporate governance level. Finally, it is evident that stock liquidity commonality mediates the relation between foreign institutional ownership and firm valuation. Foreign institutional investors can enhance firm valuation through stock liquidity commonality and stock illiquidity.

ABSTRACT We examine the causal effect of managerial litigation risk on managers’ disclosure of earnings warnings in the face of large earnings shortfalls. Exploring the staggered adoption of universal demand (UD) laws as an exogenous decrease in litigation risk, we find that the adoption leads to a decrease in managers’ issuance of earnings warnings, especially among firms facing a higher litigation risk prior to the adoption. In contrast, we find no change in managers’ tendency to alert investors of impending large positive earnings surprises. Collectively, our results provide causal evidence that higher litigation risk incentivizes managers to issue more earnings warnings. Our results differ from Bourveau et al.’s finding of an increase in the frequency of management earnings forecasts after the adoption of UD laws. We reconcile our findings with theirs by demonstrating that the effect of adopting UD laws on management earnings forecasts depends critically on forecast horizon: The adoption increases long‐horizon forecasts, but decreases short‐horizon forecasts.

ABSTRACT We test whether CEOs working near their childhood homes are less likely than nonlocal CEOs to make myopic decisions. Place attachment theories suggest that people develop mutual caretaking relationships with their birthplaces. Also, executive labor markets face less information asymmetry about local CEOs, resulting in lower pressure on local CEOs for quick profits. Consistent with the prediction, we find that local CEOs are less likely to cut R&D expenditures for beating analyst forecasts or avoiding earnings decreases. In their last year of office, local CEOs are significantly less likely to cut R&D than nonlocal CEOs. The CEO locality effect is stronger when more local business interests are embedded in the firm and when the residents of the CEO's birth state have stronger local social bonds. Local CEOs' longer horizons are consistently manifested in their other decisions, such as paying more state tax and being more socially responsible in business operation. JEL Classifications: G10; G23; M40.

ABSTRACT: Regulators and the investment community have been concerned that institutional investors pressure financial analysts through trading commission fees to issue optimistic opinions in support of their stock positions. We use a unique dataset that identifies mutual fund companies' allocation of trading commission fees to individual brokerages and provide direct evidence on this issue. In particular, we show that for stocks in which the fund companies have taken large positions, analysts are more optimistic in their stock recommendations when their brokerages receive trading commission fees from these fund companies. The relationship is stronger when the commission fee pressure is greater. The market reacts less favorably to the “Strong Buy” recommendations of analysts facing greater commission fee pressure. The funds also respond negatively to such recommendations in making portfolio adjustments. These results point to a source of analyst bias that has been little explored in the literature. Data Availability: The data are publically available from the sources identified in the paper.

ABSTRACT: This study examines the explicit use of relative performance evaluation (RPE) in executive compensation contracts and the selection of RPE peers. Using S&P 1500 firms’ first proxy disclosures under the SEC’s 2006 executive compensation disclosure rules, we find that about 25 percent of our sample firms explicitly use RPE in setting executive compensation. We demonstrate that a lack of knowledge of both actual peer-group composition and the link between RPE-based performance targets and future peer performance significantly hinder the traditional implicit test from detecting RPE use. We also find that firms consider both costs and benefits of RPE as an incentive mechanism when deciding to use RPE. Finally, both efficient contracting and rent extraction considerations influence RPE peer selection, with the relative importance of these competing considerations depending on RPE firms’ performance.

ABSTRACT We examine how hometown, school, and workplace ties between financial analysts and mutual fund managers affect their business decisions. We show that a fund manager is more likely to hold stocks covered by analysts with whom she is socially connected, and that she also makes higher profits from these holdings. Such social tie-related holding returns are higher among more opaque firms. In return, a fund manager tends to cast her star analyst votes in favor of her connected analysts, and her fund company is more likely to allocate trading commissions to her connected analysts' brokerages. Additional tests indicate that analysts more actively acquire information (through conducting corporate site visits) and issue more optimistically biased recommendations for stocks held by fund managers with whom they are connected. Overall, our results illustrate the pronounced influence of social networks on the behaviors of analysts and fund managers. JEL Classifications: G10; G23; M40. Data Availability: Data are available from the public sources cited in the text.