Abstract The extant literature shows that institutional investors engage in corporate governance to enhance a firm's long‐term value. Measuring firm performance using the F‐Score, we examine the persistent monitoring role of institutional investors and identify the financial aspects of a firm that institutional monitoring improves. We find strong evidence that long‐term institutions with large shareholdings consistently improve a firm's F‐Score and that such activity occurs primarily through the enhancement of the firm's operating efficiency. Other institutions reduce a firm's F‐Score. Moreover, we find evidence that, while monitoring institutions improve a firm's financial health, transient (followed by non‐transient) institutions trade on this information.
The extant literature shows that institutional investors engage in corporate governance to enhance a firm’s long-term value. Measuring firm performance using the F-Score, we examine the persistent monitoring role of institutional investors and identify the financial aspects of a firm that institutional monitoring improves. We find strong evidence that long-term institutions with large shareholdings consistently improve a firm’s F-Score and that such activity occurs primarily through the enhancement of the firm’s operating efficiency. Other institutions reduce a firm’s F-Score. Moreover, we find evidence that, while monitoring institutions improve a firm’s financial health, transient (followed by non-transient) institutions trade on this information.
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This study examines the role of financial misconduct of institutional investors on financial reporting quality of investee firms. We find that firms held by institutional investors with disciplinary history (IDH) are more likely to engage in financial misreporting. Our analyses show that the results are not driven by institutional investor characteristics such as activism, monitoring, investment horizon, or portfolio size. Lastly, the impact of IDH is stronger in firms with higher incentives to engage in financial misreporting (i.e., firms that barely meet analysts’ expectations and CEOs with higher career concerns). The results are also stronger if the institution reports multiple disciplinary events, disciplinary event is recent, or disciplinary action is taken against the institutional investor company rather than just its affiliates. The results continue to hold after implementing various statistical tests to address potential endogeneity issues and alternative measures of financial misreporting.
Abstract One of the main explanations for the idiosyncratic volatility (IVOL) puzzle (i.e., the negative relation between lagged IVOL and returns) is a missing risk factor. We show, analytically, that if IVOL proxies for a missing risk factor, then the negative relation between IVOL and returns should persist at the portfolio level. Empirically, we find that the IVOL puzzle disappears when we use well‐diversified portfolios as test assets. The IVOL puzzle also weakens after controlling for additional risk factors. Overall, our results suggest that both diversifiable (i.e., true idiosyncratic risk) and nondiversifiable risk play a role in explaining the IVOL puzzle.
We show that institutional ownership in equity mutual funds predicts fund performance. Our measure of institutional ownership in mutual funds is directly from institutions’ quarterly 13(f) filings so it provides a broader coverage of institutional investment in mutual funds than existing studies. Most institutions holding mutual funds are independent investment advisors and bank trusts who invest in mutual funds on behalf of their clients. Our results show that funds held by institutions perform better than funds not held by institutions for at least three years. Institutions’ informational advantage is the main driver of the outperformance of institution-held funds.
This paper reevaluates the cross-sectional effect of institutional ownership on idiosyncratic volatility by conditioning on institutions’ investment horizon. Prior literature establishes a positive link between growing institutional ownership and idiosyncratic volatility. However, this effect may vary depending on the type of institutional ownership. We document that short-term (long-term) institutional ownership is positively (negatively) linked to idiosyncratic volatility in the cross section. These opposite effects persist after controlling for institutional preferences and information-based trading and remain qualitatively unchanged after controlling for endogeneity. This suggests that short-term (long-term) institutions exhibit higher (lower) trading activity, which increases (decreases) idiosyncratic volatility.
A widely held view concerning hedge funds is that they act as a negative disruptive force in financial markets due to “contagion.” Hedge funds are often viewed as culprits in both the 2007–2008 financial crisis and the 2007 quant crisis, for example. The authors evaluate both existing and new evidence of: 1) hedge fund contagion, 2) hedge fund crowding, 3) hedge funds’ role in the 2007–2008 financial crisis, and 4) hedge funds’ role in the August 2007 quant crisis. Contrary to conventional wisdom, the popular press, and most academic work, the authors find little evidence to support the view that hedge fund contagion has widespread negative effects on markets and mispricing. TOPICS:Real assets/alternative investments/private equity, financial crises and financial market history, tail risks
