This paper reevaluates the cross‐sectional effect of institutional ownership on idiosyncratic volatility by conditioning on institutions' investment horizon. Prior literature establishes a positive link between growing institutional ownership and idiosyncratic volatility. However, this effect may vary depending on the type of institutional ownership. We document that short‐term (long‐term) institutional ownership is positively (negatively) linked to idiosyncratic volatility in the cross section. These opposite effects persist after controlling for institutional preferences and information‐based trading and remain qualitatively unchanged after controlling for endogeneity. This suggests that short‐term (long‐term) institutions exhibit higher (lower) trading activity, which increases (decreases) idiosyncratic volatility.
This paper reevaluates the cross-sectional effect of institutional ownership on idiosyncratic volatility by conditioning on institutions' investment horizon. Prior literature establishes a positive link between growing institutional ownership and idiosyncratic volatility. However, this effect may vary depending on the type of institutional ownership. We document that short-term (long-term) institutional ownership is positively (negatively) linked to idiosyncratic volatility in the cross section. These opposite effects persist after controlling for institutional preferences and information-based trading and remain qualitatively unchanged after controlling for endogeneity. This suggests that short-term (long-term) institutions exhibit higher (lower) trading activity, which increases (decreases) idiosyncratic volatility.1 Brandt et al. (2010) show that by 2003, aggregate IV had decreased to pre-1990s levels. They find no evidence that institutional investors caused the increase in IV in early 2000. As such, the authors conclude that the increase could have been caused by retail investors. 2 See Jones and Lipson (2003) and Kaniel et al. (2008) for evidence of institutional investor dominance in the financial market. 3 See Karpoff (1987) for a review on the early literature in this area. His synthesis of previous research concludes that while there is a positive correlation between the absolute value of price changes and volume, the relation between price changes per se and volume is non-monotonic and asymmetric (i.e., the correlation between volume and positive price changes is positive, while that between volume and negative price changes is negative). Schwert (1989) and Gallant et al. (1992) also provide good reviews of the empirical and theoretical research in this area.
We decompose the accrual premium and study its components in the debt and equity markets. We show that the importance of each accrual component depends on the sample and the type of market considered. The short-term accruals component is primarily observed in equity markets, among small and young companies, which is consistent with mispricing arguments. The long-term accruals premium is consistently positive and significant in different samples and markets. This component reflects growth in capital expenditures, and it is counter-cyclical and predictable, which is in line with investment-based explanations. Finally, the financial accruals component does not generate predictability. K E Y W O R D S accruals, debt, equity, investment, long-term accruals, short-term accruals J E L C L A S S I F I C AT I O N G11, G121 Recently, several studies have brought the accrual anomaly back under scrutiny. Mashruwala, Rajgopal, and Shevlin (2006) present evidence that low accruals stocks tend to have relatively higher volatility, trading costs, and lower liquidity, making this strategy difficult to realize. Green, Hand, and Zhang (2017) present a comprehensive study of 94 different stock characteristics and show that most fundamental accounting information variables (including accruals) do not provide independent information about equity returns. On the contrary, Hou, Xue, and Zhang (2018) compile a replication study for 452 anomalies and report that fundamental information based anomalies replicate better than J Bus Fin Acc. 2019;46:879-912. wileyonlinelibrary.com/journal/jbfa c 2019 John Wiley & Sons Ltd 8792. The long-term component of accruals is related to growth/investment risk. Consistent with the implications of Q-theory, we show that expected returns to accrual-based trading strategies are counter-cyclical and time-varying in the bond markets. 6 The predictability of accruals in the credit market is significantly higher during bad states and lowaccrual portfolios have significantly higher exposure to growth risk. 7 These results are particularly pronounced for the long-term component of accruals, which is more likely related to investments.3. Apparent differences in accrual predictability between equity and bond markets are driven by sample characteristics. We investigate what drives the apparent difference in the accrual premium between the bond and equity markets.Once we control for differences in sample characteristics by using a matched equity to bond sample, we show that both bond and equity markets produce similar return predictability. Specifically, in the matched sample, the equity accrual premium is also only driven by the non-current component of accruals, and current working capital does not affect equity returns. 8 Similarly, our results show that the non-current component of accruals is related to growth-related risk in the equity market. On the contrary, the working capital accruals are less likely to be driven by investments risk. However, this component is important and significant, especially for sma...
PurposeThe purpose of this paper is to investigate the connection between the accrual quality and the growth/value characteristics (and their return premia) at firm level.Design/methodology/approachThe paper employs a battery of univariate and multivariate cross‐sectional tests. Fama‐MacBeth regressions with main effects and interaction effects are used to identify the relation between accrual quality, book‐to‐market and returns. The analysis is conducted on the overall sample, as well as after conditioning on up and down markets.FindingsValue (growth) stocks are more likely to be associated with high (low) accrual quality. Value stocks earn higher returns mainly in down markets, while poor accrual quality firms have significantly higher returns during up markets, but significantly lower returns during down markets. There is a significant interaction effect between accrual quality and the value premium, which only exhibits in the down markets (i.e. stocks with poor accrual quality earn a higher value premium in down markets than stocks with good accrual quality).Originality/valueResults in this paper help disentangle between various explanations proposed for the accrual quality premium and the value premium. These findings are consistent with the idea that the same underlying risk factor generating the value premium also generates the cross‐sectional variation in accrual quality responsible for the accrual quality premium. From the corporate managers' perspective, the results imply that value firms can mitigate their higher costs of capital by providing high quality of accounting information. From an analyst's perspective, the study suggests that considering both accrual quality and growth characteristics can help make better portfolio allocation decisions than when these are considered separately.
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