The Effect of Institutional Ownership on Firm Transparency and Information Production

49 Pages Posted: 22 Nov 2014 Last revised: 9 Jul 2015

Audra L. Boone

Texas Christian University - M.J. Neeley School of Business

Joshua T. White

Vanderbilt University - Finance

Date Written: June 12, 2015

Abstract

We examine the effects of institutional ownership on firms’ information and trading environments using the annual Russell 1000/2000 index reconstitution. Characteristics of firms near the index cutoffs are similar, except that firms in the top of the Russell 2000 have discontinuously higher proportional institutional ownership than firms in the bottom of the Russell 1000 primarily due to indexing and benchmarking strategies. We find that higher institutional ownership is associated with greater management disclosure, analyst following, and liquidity, resulting in lower information asymmetry. Overall, indexing institutions’ predilection for lower information asymmetries facilitates information production, which enhances monitoring and decreases trading costs.

Keywords: Institutional investors, Indexing, Voluntary disclosure, Earnings forecasts, Information asymmetry

JEL Classification: G23, G34

Suggested Citation

Boone, Audra L. and White, Joshua T., The Effect of Institutional Ownership on Firm Transparency and Information Production (June 12, 2015). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2528891 or http://dx.doi.org/10.2139/ssrn.2528891

Audra Boone (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Joshua T. White

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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