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

Author

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  • Marco Ceccarelli

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

Abstract

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.

Suggested Citation

  • Marco Ceccarelli, 2018. "Walk the Line: Do Investors Reward Firms that Exploit Regulatory Grey Areas?," Swiss Finance Institute Research Paper Series 18-62, Swiss Finance Institute, revised Feb 2019.
    • Handle: RePEc:chf:rpseri:rp1862
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