Expected Mispricing: The Joint Influence of Accounting Transparency and Investor Base
Journal of Accounting Research, Forthcoming
49 Pages Posted: 13 Sep 2008 Last revised: 16 Aug 2012
Date Written: January 1, 2009
We examine how accounting transparency and investor base jointly affect financial analysts’ expectations of mispricing (i.e., expectations of stock price deviations from fundamental value). Within a range of transparency, these two factors interactively amplify analysts’ expectations of mispricing - analysts expect a larger positive deviation when a firm’s disclosures more transparently reveal income-increasing earnings management and the firm’s most important investors are described as transient institutional investors with a shorter-term horizon (low concentration in holdings, high portfolio turnover, and frequent momentum trading) rather than dedicated institutional investors with a longer-term horizon (high concentration in holdings, low portfolio turnover, and little momentum trading). Results are consistent with analysts anticipating that transient institutional investors are more likely than dedicated institutional investors to adjust their trading strategies for near-term factors affecting stock mispricings. Our theory and findings extend the accounting disclosure literature by identifying a boundary condition to the common supposition that disclosure transparency necessarily mitigates expected mispricing, and by providing evidence that analysts’ pricing judgments are influenced by their anticipation of different investors’ reactions to firm disclosures.
Keywords: analysts, expected mispricing, institutional investor, disclosure transparency
JEL Classification: G14, M41, M43, M45, G32, G29
Suggested Citation: Suggested Citation