Disclosure Quality, Institutional Investors, and 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.

JEL Classification: M41, G12, G23