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

See all articles by W. Brooke Elliott

W. Brooke Elliott

University of Illinois at Urbana-Champaign

Susan D. Krische

American University - Kogod School of Business

Mark E. Peecher

University of Illinois at Urbana-Champaign; University of Illinois College of Law

Date Written: January 1, 2009

Abstract

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

Elliott, W. Brooke and Krische, Susan D. and Peecher, Mark E., Expected Mispricing: The Joint Influence of Accounting Transparency and Investor Base (January 1, 2009). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1267239 or http://dx.doi.org/10.2139/ssrn.1267239

W. Brooke Elliott (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Susan D. Krische

American University - Kogod School of Business ( email )

4400 Massachusetts Ave NW
Washington, DC 20016
United States
202-885-2082 (Phone)
202-885-1992 (Fax)

Mark E. Peecher

University of Illinois at Urbana-Champaign ( email )

Gies College of Business
1206 South Sixth Street
Champaign, IL 61820
United States
217-333-4542 (Phone)
217-244-0902 (Fax)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

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