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Abstract:
We examine whether the application of basic concepts 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 investigates whether the quality of a firm's disclosure practices affects the composition of a firm's institutional investor base and whether this association has implications for a firm's stock return volatility. The findings indicate that firms with higher disclosure quality, as measured by AIMR rankings, have greater institutional ownership, but the particular types of institutional investors that are attracted to disclosure quality tend to have no net impact on firms' stock return volatility. In contrast, improvements in disclosure quality are shown to produce contemporaneous increases in ownership primarily by transient-type institutions. Such institutions can be characterized as having a short-term investment focus along with a propensity to trade aggressively. The findings indicate that firms with disclosure quality improvements resulting in higher transient institutional investor ownership experience subsequent increases in stock return volatility.

Abstract:
This paper investigates whether the quality of a firm's disclosure practices affects the composition of a firm's institutional investor base and whether this association has implications for a firm's stock return volatility. The findings indicate that firms with higher disclosure quality, as measured by AIMR rankings, have greater institutional ownership, but the particular types of institutional investors that are attracted to disclosure quality tend to have no net impact on firms' stock return volatility. In contrast, improvements in disclosure quality are shown to produce contemporaneous increases in ownership primarily by transient-type institutions. Such institutions can be characterized as having a short-term investment focus along with a propensity to trade aggressively. The findings indicate that firms with disclosure quality improvements resulting in higher transient institutional investor ownership experience subsequent increases in stock return volatility.

Abstract:
This paper examines the influence of institutional investors on the incentives of corporate managers to alter long-term investment for earnings management purposes. Many critics argue that the short-term focus of institutional investors encourages managers to sacrifice long-term investment to meet current earnings targets. Others argue that the large stockholdings and sophistication of institutions allow them to fulfill a monitoring role in preventing such myopic investment behavior. 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 typically serve a monitoring role relative to individual investors. However, I find that a high proportion of ownership by institutions exhibiting ?transient? ownership behavior (i.e., high portfolio turnover and momentum trading) significantly increases the probability that managers reduce R&D to boost earnings. These results indicate that high turnover and momentum trading by institutional investors can encourage 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:
This paper examines the economic consequences of a recent regulatory change mandating OTC Bulletin Board firms to comply with the reporting requirements under the 1934 Securities Exchange Act. This change substantially increases the required disclosures for firms that previously did not file with the SEC. We document that the imposition of SEC disclosure requirements results in significant costs for smaller firms, essentially forcing them off the OTCBB. However, SEC disclosure regulation also has significant benefits. Firms filing with the SEC prior to the change experience positive stock returns and permanent increases in liquidity, consistent with positive externalities from disclosure regulation. Moreover, newly compliant firms exhibit significant increases in liquidity upon compliance consistent with the notion that disclosure reduces information asymmetry and improves market liquidity.

Mandatory disclosure, Enforcement, Externalities, Over-the-counter market, Liquidity, Listing choices, Eligibility rule

Abstract:
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.

Mandatory disclosure, enforcement, externalities, over-the-counter market, liquidity, listing choices, eligibility rule

Abstract:
A substantial body of academic literature provides evidence of stock market trading strategies that generate appreciable abnormal returns. However, there are a number of factors that could partially or fully mitigate the ability of market participants to implement these trading strategies, such as price pressure, restrictions against short sales, and incentives to hold no more than 5% ownership in a firm. We investigate the extent to which these factors account for the evidence of abnormal returns found in seven trading strategies documented in prior research. We find that the size and return reversal trading strategies do not perform well in the presence of the various constraints, whereas the cash flow-to-price, return momentum, post-earnings announcement drift, and operating accrual strategies generally continue to generate significant positive abnormal returns. We find that the book-to-market strategy generates significant positive abnormal returns in about 50% of the scenarios we examine. We find that all of the strategies generate positive abnormal returns in the presence of the restriction against short sales, but that price impact adjustments and constraints on holding more than a 5% stake in any portfolio firm each have a large negative effect on portfolio returns. We also find that equally-weighted portfolio allocations generally perform better than value-weighted allocations and funds with a greater number of stocks and/or lower initial market capitalization also generally produce higher returns. Finally, we find that portfolios that engage in short positions perform worse than long-only portfolios due primarily to the sustained increase in stock prices during the sample period.

stock market trading strategies, portfolio implementability, market efficiency

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 near-term (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.

Institutional investors; Managerial myopia; Investor clienteles; Market efficiency

Abstract:
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.

Abstract:
Many small firms face significant challenges in improving visibility and attracting investors to their stock. One response to these challenges is to initiate an investor relations (IR) program. Through interviews and surveys with IR professionals, we learn that the IR process focuses on management access and company visibility as key drivers of the strategy's success, with attracting institutional investors as a common goal. Our empirical tests examine a sample of 210 small- and mid-cap companies that increased IR activities (proxied by the hiring of an outside IR firm). Our results show that the companies exhibit increases in disclosure, media coverage, and analyst following. They also exhibit substantial and ongoing increases in institutional investor ownership. As part of this increase, our sample firms experience a shift in investor composition toward institutions that are more geographically distant and that tend to invest in larger companies, consistent with the IR activities creating visibility to a different type of investor. Finally, there are improvements in valuation in the year following the IR initiation, as proxied by the book-to-price ratio and stock returns. Overall, our results indicate that IR activities focused on increasing firm visibility are successful in impacting market participants' interactions with the companies.

Investor Relations, Visibility, Disclosure, Institutional Investors, Analysts, Media

Abstract:
This paper investigates the effect of regulation that mandates open access to information on managers' disclosure choices and investors' reactions to disclosures. The recently passed Regulation FD (Reg FD) requires firms to make material disclosures broadly available. Using a sample of firms that previously restricted access to conference calls and a sample of firms that voluntarily allowed unlimited access to their calls in the pre-Reg FD period, we examine the effect of the new rule on managers' decisions regarding the timing, use, and information content of calls, as well as the effect on investors' trading behavior during the call. Our results indicate that Reg FD had a significant negative impact on managers' decisions to continue hosting conference calls and on their decisions regarding the optimal time to hold the call. However, contrary to the concerns of many critics, the magnitudes of these changes are not large. We do not find evidence that Reg FD decreased the amount of information disclosed during the call period, contrary to the concerns of Reg FD opponents. Finally, we find evidence that the new rule increased price volatility for firms that previously restricted access to their calls (relative to firms that previously held open calls) and that the amount of individual investor trading increased following the rule change. Overall, our results suggest that Reg FD impacted trading during the conference call window for firms most affected by the new regulation.

Disclosure Regulation, Regulation FD, Disclosure Policy, Individual Investor Trading, Price Volatility

Abstract:
This paper investigates the effect of regulation that mandates open access to information on managers' disclosure choices and investors' reactions to disclosures. The recently passed Regulation FD (Reg FD) requires firms to make material disclosures broadly available. Using a sample of firms that previously restricted access to conference calls and a sample of firms that voluntarily allowed unlimited access to their calls in the pre-Reg FD period, we examine the effect of the new rule on managers' decisions regarding the timing, use, and information content of calls, as well as the effect on investors' trading behavior during the call. Our results indicate that Reg FD had a significant negative impact on managers' decisions to continue hosting conference calls and on their decisions regarding the optimal time to hold the call. However, contrary to the concerns of many critics, the magnitudes of these changes are not large. We do not find evidence that Reg FD decreased the amount of information disclosed during the call period, contrary to the concerns of Reg FD opponents. Finally, we find evidence that the new rule increased price volatility for firms that previously restricted access to their calls (relative to firms that previously held open calls) and that the amount of individual investor trading increased following the rule change. Overall, our results suggest that Reg FD impacted trading during the conference call window for firms most affected by the new regulation.

Disclosure regulation, Regulation FD, Disclosure Policy, Individual Investor Trading, Price Volatility

Abstract:
Because spin-offs create new firms with characteristics markedly different from the original firm, institutional investors pre-committed to certain investment styles and/or subject to fiduciary restrictions have incentives to rebalance their portfolios at the time of the spin-off. Prior articles in the business press and academic journals claim that the large volume of trading related to this rebalancing creates short-term price pressure in stocks of the entities emerging from the spin-off. In this paper, we examine whether corporate spin-offs lead to significant changes in the holdings of institutional investors and whether these changes do create temporary price pressure. We find strong evidence that investment strategy and fiduciary restrictions affect institutional investor demand for the stocks after spin-offs. However, our results indicate that matching of institutional buying and selling is sufficiently complete in most cases to allow for large volumes of shares to change hands without prices deviating from fundamentals.

Abstract:
This paper examines the relation between accounting method choice and investment by US institutional investors in non-US firms. Such a relation could be driven by two factors. First, "home bias" in US investment could result in preferences for accounting practices familiar to US investors. The use of accounting methods consistent with US GAAP reduces information processing costs for US investors, allowing for more thorough analyses and increasing the credibility of the financial information. Second, many sources consider US GAAP to be one of the highest quality sets of financial reporting standards in the world. Thus, US investors likely perceive firms that use accounting methods allowed under US GAAP as having higher accounting quality. We find that firms with higher degrees of conformity with US GAAP have greater levels of US institutional ownership. These associations are exhibited in levels and changes, and are robust to the inclusion of a number of control variables for other determinants of institutional investment. Lead/lag regressions suggest that increases in US GAAP conformity attract a higher level of US institutional investment in future periods, but changes in US institutional holdings do not lead to changes in accounting methods. In partition analyses, we find that the positive relation between US GAAP conformity and US institutional investment holds regardless of a firm's ADR status or other proxies for visibility (e.g., stock index listing, analyst following, and firm size). However, the relation is significantly stronger in the subsamples of ADR firms and more visible firms, suggesting that US GAAP conformity has greater impact among firms already somewhat visible to US investors.

Accounting Choice, Institutional Investors, US GAAP, Home Bias

Abstract:
This paper examines the relation between accounting method choice and investment by US institutional investors in non-US firms. Such a relation could be driven by two factors. First, home bias in US investment could result in preferences for accounting practices familiar to US investors. The use of accounting methods consistent with US GAAP reduces information processing costs for US investors, allowing for more thorough analyses and increasing the credibility of the financial information. Second, many sources consider US GAAP to be one of the highest quality sets of financial reporting standards in the world. Thus, US investors likely perceive firms that use accounting methods allowed under US GAAP as having higher accounting quality. We find that firms with higher degrees of conformity with US GAAP have greater levels of US institutional ownership. These associations are exhibited in levels and changes, and are robust to the inclusion of a number of control variables for other determinants of institutional investment. Lead/lag regressions suggest that increases in US GAAP conformity attract a higher level of US institutional investment in future periods, but changes in US institutional holdings do not lead to changes in accounting methods. In partition analyses, we find that the positive relation between US GAAP conformity and US institutional investment holds regardless of a firm's ADR status or other proxies for visibility (e.g., stock index listing, analyst following, and firm size). However, the relation is significantly stronger in the subsamples of ADR firms and more visible firms, suggesting that US GAAP conformity has greater impact among firms already somewhat visible to US investors.

Accounting Choice, Institutional Investors, US GAAP, Home Bias

Abstract:
Recent advances in information technology allow firms to provide broader access to their disclosures. We examine the determinants and effects of the decision to provide unlimited real-time access to conference calls (i.e., "open" conference calls). Our evidence suggests that the decision to provide open calls is associated with the composition of a firm's investor base and, to some degree, the complexity of its financial information. We also find that open calls are associated with a greater increase in small trades (consistent with individuals trading on information released during the call) and higher price volatility during the call period.

conference calls, corporate disclosure, selective disclosure, price volatility, institutional investors

Abstract:
Recent advances in information technology allow firms to provide broader access to their disclosures. We examine the determinants and effects of the decision to provide unlimited real-time access to conference calls (i.e., "open"conference calls). Our evidence suggests that the decision to provide open calls is associated with the composition of a firm's investor base and, to some degree, the complexity of its financial information. We also find that open calls are associated with a greater increase in small trades (consistent with individuals trading on information released during the call) and higher price volatility during the call period.

Key Words: Conference calls, corporate disclosure, selective disclosure, price volatility, institutional investors

Abstract:
Corporate spin-offs create new firms with characteristics markedly different from the original firm. Consequently, institutional investors pre-committed to certain investment styles and/or subject to fiduciary restrictions have incentives to rebalance their portfolios at the time of the spin-off. We find strong evidence that investment strategy and fiduciary restrictions affect institutional investor demand for stocks after spin-offs. However, contrary to prior research that conjectures that large volumes of trading related to investor preferences creates short-term price pressure in the stocks of entities emerging from spin-off transactions, we find that, in general, this trading is not associated with abnormal price movements for parents or subsidiaries around the spin-off event.

Price pressure, Institutional investors, Corporate spin-offs

Abstract:
Corporate spin-offs create new firms with characteristics markedly different from the original firm. Consequently, institutional investors pre-committed to certain investment styles and/or subject to fiduciary restrictions have incentives to rebalance their portfolios at the time of the spin-off. We find strong evidence that investment strategy and fiduciary restrictions affect institutional investor demand for stocks after spin-offs. However, contrary to prior research that conjectures that large volumes of trading related to investor preferences creates short-term price pressure in the stocks of entities emerging from spin-off transactions, we find that, in general, this trading is not associated with abnormal price movements for parents or subsidiaries around the spin-off event.

Price pressure, institutional investors, corporate spin-offs

Abstract:
This paper examines the influence and characteristics of governance-sensitive institutional investors (i.e., institutions that explicitly consider firms' governance mechanisms in their investment decisions). While we find that governance-sensitive institutions tend to prefer firms with existing preferred governance mechanisms, there is evidence that ownership by governance-sensitive institutions is associated with future improvements in shareholder rights. We also find that large, low-turnover institutions with preferences for growth and small-cap firms are more likely to be governance-sensitive. Overall, our results suggest that common proxies for governance sensitivity by investors (e.g., total institutional ownership, legal type, blockholding) do not cleanly measure governance preferences.

Corporate Governance, Institutional Investors, Board of Directors

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.

Abstract:
Recent work presents evidence that certain groups of institutional investors are able to trade profitably based on private information about earnings and returns. We contribute to this literature in three ways. First, we test whether certain private information proxies are consistent with the creation and liquidation of positions based on private information. Second, we introduce private information proxies that reflect the size and nature of an institution's position in each portfolio firm. Third, we use a methodology that examines multiple investor characteristics simultaneously at the institution-firm-level. We find that changes in ownership by institutions that have large positions in a specific firm are consistent with trading based on private information. However, other previously-documented proxies for private information produce results that are more consistent with risk-based trading (e.g., investment style, portfolio turnover) or that are insignificant in the presence of the other proxies (e.g., fiduciary type). We also find that informed trading is more prevalent in return-based measures (vs. earnings-based measures) and in smaller firms. Tests for interactions among private information proxies reveal that informed trading is most evident when the large positions in firms are newly initiated and when they are taken by investment advisers and by large institutions. Finally, we find that institutions following growth strategies exhibit momentum trading in positions held less than one year and informed trading in positions held more than one year, suggesting that the information advantages to investment styles accrue over time.

Institutional investors, private information, informed trading, stock returns

Abstract:
This paper investigates whether the business press serves as an information intermediary. The press potentially shapes firms’ information environments by packaging and disseminating information, as well as by creating new information through journalism activities. We find that greater press coverage reduces information asymmetry (i.e., lower spreads and greater depth) around earnings announcements, with broad dissemination of information having a bigger impact than the quantity or quality of press-generated information. These results are robust to controlling for firm-initiated disclosures, market reactions to the announcement, and other information intermediaries. Our findings suggest that the press helps reduce information problems around earnings announcements.

Business Press, Information Asymmetry, Information Intermediaries, Earnings Announcements

Abstract:
Managerial presentations at conferences have become an increasingly important voluntary disclosure mechanism. Conference presentations differ from other types of voluntary disclosure in that they occur within a well-defined physical and social setting, which we refer to as the conference “milieu,” and they are not routinely tied to another major information event, such as a quarterly earnings release. We use a sample of 95,105 presentations, given at conferences sponsored by 849 different organizations, to examine the market reaction to conference presentations. We find that conference characteristics such as sponsor, location, size, and industry focus are significantly associated with the three-day stock return and trading volume reactions to presentations, consistent with the conference milieu affecting both managers’ incentives to disclose information and the information content stemming from the participants’ private information. We also find that these conference characteristics are associated with the impact of the presentations on long-term analyst and institutional investor following, consistent with the conference milieu affecting the pool of prospective investors for the firm.

Voluntary Disclosure, Conference Presentations, Managerial Presentations, Investor Conferences, Brokerage Conferences

Abstract:
This paper investigates whether a firm's disclosure practices affect the composition of its institutional investor ownership and, hence, its stock return volatility. The findings indicate that firms with higher AIMR disclosure rankings have greater institutional ownership, but the particular types of institutional investors attracted to greater disclosure have no net impact on return volatility. However, yearly improvements in disclosure rankings are associated with increases in ownership primarily by "transient" institutions, which are characterized by aggressive trading based on short-term strategies. Firms with disclosure ranking improvements resulting in higher transient ownership are found to experience subsequent increases in stock return volatility.

Corporate disclosure; Institutional investors; Stock Return Volatility

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 goals. 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 and 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:
This paper studies the information links that connect detailed financial statement data and security prices. We establish empirically the underlying relations between rules of fundamental analysis and: 1) analysts' earnings forecast revisions, 2) actual future earnings changes and 3) security returns. We find evidence that some but not all of the fundamental signals are related to subsequent earnings changes and analysts' revisions as hypothesized. Paradoxically, contemporaneous security returns reveal that, in the eyes of investors, the set of fundamental signals contain information orthogonal to analysts' revisions. Additional evidence suggests one explanation for this result is that analysts' forecast revisions are inefficient with respect to the future earnings information contained in some of the fundamental signals. One practical implication of our findings is that if analysts were to process efficiently the information in the fundamental signals, it would be sufficient to eliminate the well-documented phenomenon of analyst underreaction to prior earnings news.

Abstract:
This paper examines empirical relations between rules of fundamental analysis and actual future earnings changes, analysts' earnings forecast revisions, and contemporaneous stock returns. Our results indicate that many of the fundamental signals are related to future earnings and forecast revisions in the same way they are related to returns, however some significant exceptions are noted. Conditioning the relations on variables reflecting the macroeconomic, firm-specific and industry-specific contexts in which firms operate provides some further refinement to our understanding of the information contained in the fundamental signals. Additional tests suggest analysts' forecast revisions display generalized underreaction to the future earnings information contained in some of the fundamental signals.