Walk the Line: Do Investors Reward Firms that Exploit Regulatory Grey Areas?

67 Pages Posted: 10 Sep 2018 Last revised: 29 Aug 2023

Date Written: March 28, 2023

Abstract

I show that certain institutional investors prefer holding firms that exploit more of the available regulatory wiggle room (WR). Exploited WR is captured by relatively aggressive tax planning, financial reporting, and earnings management. Highlighting the importance of trust, dedicated, long-term investors hold firms that exploit 34% of a standard deviation less WR than those held by quasi-indexers. Moreover, after experiencing financial adviser misconduct that breaches their trust, investors significantly reduce the exploited WR of their holdings. This is consistent with investors choosing firms according to their preferences for WR. Additionally, these preferences impact firms by shaping their behavior.

Keywords: Behavioral investments, Corporate governance, Institutional investors

JEL Classification: G23, G4, M41

Suggested Citation

Ceccarelli, Marco, Walk the Line: Do Investors Reward Firms that Exploit Regulatory Grey Areas? (March 28, 2023). Available at SSRN: https://ssrn.com/abstract=3247044 or http://dx.doi.org/10.2139/ssrn.3247044

Marco Ceccarelli (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

HOME PAGE: http://sites.google.com/view/marcoceccarelli

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