The Effect of Institutional Ownership on the Timing of Earnings Announcements: Evidence from the Russell Index Inclusion

Abstract

Using the annual Russell 1000/2000 index reconstitution as an exogenous shock to institutional ownership (IO), I examine the effect of IO on firms’ decisions regarding the time of day to announce earnings. I argue that firms with high IO strategically choose to announce earnings after hours to facilitate post-announcement price discovery and reduce volatility because the after-hours period is largely dominated by sophisticated institutional investors. I find that firms with greater IO are more likely to announce earnings during after-market sessions (i.e., after hours after the market closes), but not during premarket sessions (i.e., after hours before the market opens). My analysis further shows that transient IO has a stronger influence on the likelihood of after-market announcements relative to quasi-indexer or dedicated institutional holdings and that firms with high IO are even more likely to announce during after-market sessions when firms have bad earnings news or when earnings include large transitory items. Lastly, I find that announcing earnings during after-market sessions indeed facilitates post-announcement price discovery and reduces volatility for firms with high IO. Collectively, my findings suggest that IO is a significant factor in firms’ disclosure timing decisions and that the timing of disclosures affects price discovery and volatility.

Keywords: Institutional investors, Earnings announcements, After-hours trading, Price discovery, Price volatility

JEL Classification: G23, G14, M41