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

69 Pages Posted: 10 Sep 2018 Last revised: 17 Feb 2019

See all articles by Marco Ceccarelli

Marco Ceccarelli

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Date Written: February 1, 2019


This paper investigates whether certain investors either prefer or dislike holding firms that exploit more of the available regulatory wiggle room and if such a strategy pays off. Exploited wiggle room (WR) is captured by relatively aggressive tax planning, financial reporting, and earnings management practices. I find that long-term, low-turnover investors hold firms with 3% higher exploited WR than those held by short-term, high-turnover investors. After experiencing financial adviser misconduct that breaches their trust, investors reduce the exploited WR of their holdings by 5%. This is consistent with investors choosing firms according to their preferences for WR. Overall, investors seem to have heterogeneous preferences for WR exploitation and a liking for cautious firms that cannot be explained by a profit maximization motive alone.

Keywords: Behavioral investments, Corporate governance, Institutional investors

Suggested Citation

Ceccarelli, Marco, Walk the Line: Do Investors Reward Firms that Exploit Regulatory Grey Areas? (February 1, 2019). Swiss Finance Institute Research Paper No. 18-62, Available at SSRN: https://ssrn.com/abstract=3247044 or http://dx.doi.org/10.2139/ssrn.3247044

Marco Ceccarelli (Contact Author)

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