Institutional investors, shareholder activism, and earnings management

Hadani, Michael; Goranova, Maria; Khan, Raihan H.

doi:10.1016/j.jbusres.2010.12.004

Cited by 198 publications

(145 citation statements)

References 113 publications

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“…CEOs in firms with lower levels of institutionalowner influence were able to achieve less compensation risk than new CEOs in firms with higher levels of influence exercised by institutional owners. These differences in compensation and risk-sharing may account in part for the finding that firms lacking significant institutional ownership do not perform as well as those featuring more institutional ownership, a result consistent with other work that shows that greater institutional ownership is associated with better financial performance [17]. The compensation contract, and in particular the arrangements with respect to how contingent pay is earned, is the primary means shareholders have to align managers' interests with their own.…”

Section: The Effects Of Institutional Ownershipsupporting

confidence: 79%

“…While it is clear that there are positive, stock-market effects associated with activism by institutional investors, this activism has produced less consistently positive results with respect to a firm's financial performance, but the finding that performance improvements are associated with investor activism is more common than not [17]. With the generally positive performance effects associated with institutional ownership, there may be other consequences of these owners on outcomes favored by shareholders, and one such outcome is CEO compensation.…”

Section: Agency Theory In Organizationsmentioning

confidence: 99%

“…Researchers seem to agree that effective oversight of managers is associated with several important consequences [9,23], but there is less consensus as to how to operationalize the influence of institutional owners. This paper uses an institutional ownership measure, after Hadani [17], which takes the percentage of outstanding shares held by the single largest institutional owner. The measure has gained currency based on earlier findings suggesting that only the largest institutional owner would likely possess any information advantage [24].…”

Section: Independent and Control Variablesmentioning

confidence: 99%

See 2 more Smart Citations

Shareholder Wealth Effects of CEO Succession

Banning

2013

AJIBM

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Companies often dismiss their chief executive officers (CEOs) when financial performance falters. This study examines why, despite the positive stock market effects, the replacement of the CEO often does little to change a company's financial performance. Thanks to the agency arrangements in some companies, new CEOs are able to negotiate favorable contracts which benefit the CEO rather than the shareholders. In a sample of 140 publicly-traded firms, we found that compensation systems for new CEOs differed as a function of institutional ownership, with total executive compensation higher and compensation risk lower in firms with lower levels of institutional ownership. Financial performance was also weaker in firms with less institutional ownership.

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Section: The Effects Of Institutional Ownershipsupporting

confidence: 79%

Section: Agency Theory In Organizationsmentioning

confidence: 99%

Section: Independent and Control Variablesmentioning

confidence: 99%

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Shareholder Wealth Effects of CEO Succession

Banning

2013

AJIBM

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“…In a study of companies from 23 countries, Aggarwal, Erel, Ferreira, & Matos (2011) find that higher institutional ownership increases the likelihood that poorly performing Chief Executive Officers (CEOs) will be terminated and that firm valuation will improve. Institutional investors help to control earnings management (Hadani, Goranova, & Khan, 2011).…”

Section: Literature Reviewmentioning

confidence: 99%

Institutional Investors, Stock Repurchases and Information Asymmetry

Scott

2014

International Journal of Financial Research

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This paper seeks to determine if institutional investors influence stock repurchases. Specifically, this study tests whether institutional investors encourage stock repurchases in firms with high information asymmetry. Firm and year fixed effect regressions examining the effect of changes in institutional investor levels to subsequent changes in stock repurchase levels are used. For robustness, regressions are run using difference-GMM regressions and regressions for different time periods on the same relationship. I find that increased institutional ownership leads to increased stock repurchases and this relationship is stronger in firms with higher information asymmetry. Results indicate that institutional investors encourage management to increase repurchases so as to exploit their informational advantage over less informed investors about the true value of the firm. Institutions are the dominant force in U.S. stock ownership. The results in this paper indicate that institutional investors are using their informational advantage in firms that are difficult to value in an attempt to boost their return at the expense of other less informed shareholders.

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“…In a study of companies from 23 countries, Aggarwal, Erel, Ferreira, and Matos (2011) find that higher institutional ownership increases the likelihood that poorly performing Chief Executive Officers (CEOs) will be terminated and that firm valuation will improve. Also, institutional investors help to control earnings management (Hadani, Goranova, & Khan, 2011).…”

Section: Literature Reviewmentioning

confidence: 99%

Institutional Investors, Payout Policy, and Agency Costs

Scott

2014

AFR

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This paper seeks to determine if institutional investors influence corporate payout policies. Specifically, this study tests whether institutional investors encourage higher payouts in firms with higher free cash flow and poor growth opportunities. Firm and year fixed effect regressions examining the effect of changes in institutional investor levels to subsequent changes in payout levels are used. For robustness, difference-GMM regressions and regressions for different time periods are performed on the same relationship. Increased institutional ownership leads to increases in total payouts, especially in firms with high free cash flow and poor investment opportunities (low q). According to agency-based free cash flow theory, stockholders should prefer that the management of firms with higher free cash flow and poor investment opportunities increase payouts to shareholders. The results indicate that institutional shareholders reduce agency costs by encouraging management to raise payouts, thus benefiting institutional investors and non-institutional shareholders.

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Institutional investors, shareholder activism, and earnings management

Cited by 198 publications

References 113 publications

Shareholder Wealth Effects of CEO Succession

Shareholder Wealth Effects of CEO Succession

Institutional Investors, Stock Repurchases and Information Asymmetry

Institutional Investors, Payout Policy, and Agency Costs

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