The Effect Of Investment Horizon On Institutional Investors Incentives To Acquire Private Information On Long Term Earnings
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The Effect Of Investment Horizon On Institutional Investors Incentives To Acquire Private Information On Long Term Earnings
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Author : Bin Ke
language : en
Publisher:
Release Date : 2006
The Effect Of Investment Horizon On Institutional Investors Incentives To Acquire Private Information On Long Term Earnings written by Bin Ke and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006 with categories.
We use quarterly institutional ownership changes to test the effect of investment horizon on institutional investors' incentives to acquire private information on long term earnings. Short horizon institutions' ownership changes contain private information on long term earnings, but only to the extent that such private information will be reflected in near term stock prices. There is little evidence that long horizon institutions' ownership changes contain private information on long term earnings that will be revealed in near term stock prices, but long horizon institutions' ownership changes contain private information on long term earnings that will be reflected in longer term stock prices.
Investor Horizon And Managerial Short Termism
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Author : Ugur Lel
language : en
Publisher:
Release Date : 2019
Investor Horizon And Managerial Short Termism written by Ugur Lel and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
This paper shows that long-term shareholders embed horizon incentives in executive compensation contracts as a mechanism to promote long-term oriented managerial behavior. Increases in long-term institutional ownership lead to longer equity vesting periods measured by CEO pay duration. Further, CEO pay duration decreases following hedge-fund activism that is often argued to be associated with short-term investment horizon. To establish causality, we use institutional mergers as an exogenous change in institutional investor horizon, and to address reverse causality, we use the indexing behavior of institutions. Overall, CEO pay duration is a potential mechanism for institutional investors to align managerial horizon with their investment horizon, and ultimately to influence corporate behavior.
Investors Horizon And Stock Prices
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Author : Sahar Parsa
language : en
Publisher:
Release Date : 2011
Investors Horizon And Stock Prices written by Sahar Parsa and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011 with categories.
This dissertation consists of three essays on the relation between investors' trading horizon and stock prices. The first chapter explores the theoretical relation between the horizon of traders and the negative externality generated by their activity on the information revealed by stock prices. The last two chapters focus on the empirical relation between institutional investors trading frequency and stock prices behaviour. The first chapter examines how short term trading impacts the aggregation of information in financial markets. I develop a model where short-term traders, in an attempt to learn about the average beliefs of future market participants, make the price relatively more noisy. This typically introduces a negative informational externality on long-term investors. I show that (i) as the horizon of the informed traders decreases, the price becomes relatively less precise; (ii) an inflow of informed traders in the market can decrease the informativeness of the price when the traders have a relatively short horizon or the market is expected to be thin in the future; (iii) finally, as rational informed short-term traders have access to an extra source of information about the future price, they end up creating more noise and a decrease in the informativeness of the price might result. Thus, paradoxically, more informed trading could lead to a less informative price. Among scholars, practitioners and policy makers, investor short-termism and high frequency trading have been associated with excess volatility in financial markets and with a disconnect between asset prices and fundamentals. Motivated by this observation, in Chapter 2 I construct a novel measure of the intrinsic frequency of trading for each of the large US institutional investors (13-F institutions) using Thomson-Reuters Institutional Holdings quarterly data for the period 1980-2005. This measure controls for the market and portfolio characteristics and identifies an investor-specific fixed effect in the frequency of trading. I then study how the composition of these fixed effects impacts stock price behavior through their forecasting role in explaining the return and the return on equity (cash flow of a company) in the short run as well as the long run. I show that (i) the securities in which investors exhibit higher intrinsic trading frequency exhibit higher volatility, but (ii) this volatility is mainly driven by the cashflow component of the security prices. Further, (iii) the prices of the securities held by investors with a higher intrinsic trading frequency do not forecast the long-run return as opposed to the securities held by investors with a lower intrinsic trading frequency. As such, the prices mainly respond to the long-run return on equity. Overall, the results challenge the view that higher frequency of trading-a commonly used proxy for investor short-termnism-causes a disconnect between asset prices and fundamentals. Finally, in Chapter 3 (co-auhtored with Fernando Duarte) we show a novel relation between the institutional investors' intrinsic trading frequency-a commonly used proxy for the investors's investment horizon- and the cross-section of stock returns. We show that the 20$ of stocks with the lowest trading frequency earn mean returns that are 6 percentage points per year higher than the 20% of stocks that have the highest trading frequency. The magnitude and predictability of these returns persist or even increase when risk-adjusted by common indicators of systematic risks such as the Fama-French, liquidity or momentum factors. Our results show that the characteristics of stockholders affect expected returns of the very securities they hold, supporting the view that heterogeneity among investors is an important dimension of asset prices.
Taking A Long View
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Author : Yeejin Jang
language : en
Publisher:
Release Date : 2017
Taking A Long View written by Yeejin Jang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
This paper studies how the investment horizon of institutional investors affects firms' earnings management strategies. We find that firms largely held by long-term investors are more likely to manage earnings through adjusting operational decisions than through manipulating accruals. The impact of an investor's trading horizon on real activities manipulation is stronger when long-term investors face high performance pressures with low fund flows and high market uncertainty and when they have strong influence on managers with large holdings. We further document that adverse future consequences of operational adjustment are relatively less severe for the firms with long-term investors than for those with short-term investors. Overall, the evidence suggests that firms choose earnings management methods to meet earnings expectations of institutional investors who have different earnings target windows. Our identification strategy exploits the Russell 2000 Index inclusions as an instrumental variable for the investor horizon and confirms our results are robust to endogeneity concerns.
How Does The Investment Horizon Of Institutional Investors Of A Firm Affect The Information Asymmetry Of Its Stock
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Author : Hoang Luong
language : en
Publisher:
Release Date : 2016
How Does The Investment Horizon Of Institutional Investors Of A Firm Affect The Information Asymmetry Of Its Stock written by Hoang Luong and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
Our empirical evidence establishes a positive association between short-term institutional ownership and private information in stock trading but a negative correlation between long-term institutional ownership and private information. These relations suggest that short-term institutional investors tend to explore their information advantage and trade speculatively for short-term profits, while long-term institutional investors are more likely to monitor the firms they own, leading to the reduction of the information asymmetry about the firm's fundamental values. Our results are robust to the inclusion of controls for firm characteristics, analyst coverage and insider trading, as well as the choice of different private information proxies and estimation methods. Overall, our findings highlight the important role of investment horizon of institutional investors in shaping a firm's information environment.
Bovernance And Bank Valuation
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Author : Gerard Caprio
language : en
Publisher: World Bank Publications
Release Date : 2003
Bovernance And Bank Valuation written by Gerard Caprio and has been published by World Bank Publications this book supported file pdf, txt, epub, kindle and other format this book has been release on 2003 with Bancos categories.
"Which public policies and ownership structures enhance the governance of banks? This paper constructs a new database on the ownership of banks internationally and then assesses the ramifications of ownership, shareholder protection laws, and supervisory/regulatory policies on bank valuations. Except in a few countries with very strong shareholder protection laws, banks are not widely held, but rather families or the State tend to control banks. We find that (i) larger cash flow rights by the controlling owner boosts valuations, (ii) stronger shareholder protection laws increase valuations, and (iii) greater cash flow rights mitigate the adverse effects of weak shareholder protection laws on bank valuations. These results are consistent with the views that expropriation of minority shareholders is important internationally, that laws can restrain this expropriation, and concentrated cash flow rights represent an important mechanism for governing banks. Finally, the evidence does not support the view that empowering official supervisory and regulatory agencies will increase the market valuation of banks"--NBER website
Do Institutional Investors Prefer Near Term Earnings Over Long Run Value
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Author : Brian J. Bushee
language : en
Publisher:
Release Date : 2011
Do Institutional Investors Prefer Near Term Earnings Over Long Run Value written by Brian J. Bushee and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011 with categories.
Critics often argue that institutional investors have an excessive focus on short-term firm performance that leads corporate managers to make decisions to boost short-term earnings at the expense of long-run value. 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. Using the Ohlson [1995] model, I separate firm value into three components-book value, expected near-term earnings, and expected long-term (terminal) value-and test whether institutions prefer firms for which more of firm value is expected to be realized as near-term earnings rather than as long-term earnings. The results indicate that the level of ownership by institutions with short investment horizons (transient institutions) and by institutions held to stringent fiduciary standards (banks) is positively (negatively) associated with the amount of value in near-term (long-term) earnings. This evidence indicates that institutions with the strongest incentives to favor firms with a high proportion of value in near-term earnings exhibit such preferences. This evidence that banks and transient institutions prefer near-term earnings over long-run value 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.
Institutional Investor Horizons Information Environment And Firm Financing Decisions
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Author : Xin (Simba) Chang
language : en
Publisher:
Release Date : 2018
Institutional Investor Horizons Information Environment And Firm Financing Decisions written by Xin (Simba) Chang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
We provide evidence that investment horizons of institutional shareholders affect firms' financing decisions. We find that short-term institutional ownership positively affects firms' likelihood of equity relative to debt issues, the size of equity issues, and the likelihood of long-term relative to short-term debt issues. Firms held more by short-term institutions have lower financial leverage and longer debt maturities. These results suggest that short-horizon institutions, backed by buy-side research, improve the transparency of the information environment, which allows firms to issue more information-sensitive securities. Our findings suggest that institutional investor horizons influence firms' financing decisions by shaping their information environment.
Investor Horizon And Ceo Horizon Incentives
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Author : Brian D. Cadman
language : en
Publisher:
Release Date : 2014
Investor Horizon And Ceo Horizon Incentives written by Brian D. Cadman and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
We examine the relation between shareholder investment horizon and CEO horizon incentives derived from compensation contracts. We find that influential incumbent shareholders provide managers with short-horizon incentives to maximize current firm value when these shareholders plan to sell their stock. Specifically, we use the IPO setting in which venture capitalists represent short-horizon, controlling investors with strong selling incentives after the IPO. We predict and find that VC's short-term incentives influence CEO's annual horizon incentives following the IPO. At the same time, institutional monitoring limits the influence of VCs on annual, short-horizon incentives. To preempt this disciplining by market participants, VCs grant equity prior to the IPO that correspond with their short-horizons and result in shorter portfolio horizon incentives for the CEO after the IPO. We also document a positive relation between long-run abnormal stock returns and horizon incentives, consistent with horizon incentives influencing management actions.
Institutional Investor Horizon And Firm Valuation Around The World
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Author : Simon Döring
language : en
Publisher:
Release Date : 2020
Institutional Investor Horizon And Firm Valuation Around The World written by Simon Döring and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2020 with categories.
Using a comprehensive dataset of firms from 34 countries, we study the effect of institutional investors' investment horizons on firm valuation around the world. We find a positive relation between institutional ownership and firm value that is driven by short-horizon institutional investors. Accounting for the interaction between investors' investment horizon and nationality, we show that foreign short-horizon institutions, which are more likely to discipline managers through the threat of exit rather than engaging in monitoring made costly by the liability of foreignness, are the investor group with the strongest effect on firm value. Reinforcing the threat of exit channel, we find that the value-enhancing effect of short-horizon investors is stronger in the presence of multiple short-horizon investors, who are more likely to engage in competitive trading. The positive valuation effect of short-horizon investors is stronger when stock liquidity is high, which makes the exit threat more credible, and in firms prone to free cash flows agency problems. Overall, our results are consistent with short-horizon institutional investors, especially foreign institutional owners, affecting firm value by disciplining managers through credible threats of exit.