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The effect of institutional ownership on firm transparency and information production

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  • Boone, Audra L.
  • White, Joshua T.

Abstract

We examine the effects of institutional ownership on firms׳ information and trading environments using the annual Russell 1000/2000 index reconstitution. Characteristics of firms near the index cutoffs are similar, except that firms in the top of the Russell 2000 have discontinuously higher proportional institutional ownership than firms in the bottom of the Russell 1000 primarily due to indexing and benchmarking strategies. We find that higher institutional ownership is associated with greater management disclosure, analyst following, and liquidity, resulting in lower information asymmetry. Overall, indexing institutions׳ predilection for lower information asymmetries facilitates information production, which enhances monitoring and decreases trading costs.

Suggested Citation

  • Boone, Audra L. & White, Joshua T., 2015. "The effect of institutional ownership on firm transparency and information production," Journal of Financial Economics, Elsevier, vol. 117(3), pages 508-533.
  • Handle: RePEc:eee:jfinec:v:117:y:2015:i:3:p:508-533
    DOI: 10.1016/j.jfineco.2015.05.008
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    References listed on IDEAS

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    Cited by:

    1. Itzhak Ben-David & Francesco A. Franzoni & Rabih Moussawi, 2016. "Exchange Traded Funds (ETFs)," Swiss Finance Institute Research Paper Series 16-64, Swiss Finance Institute.
    2. repec:eee:reveco:v:49:y:2017:i:c:p:17-57 is not listed on IDEAS
    3. repec:kap:apfinm:v:24:y:2017:i:4:d:10.1007_s10690-017-9235-0 is not listed on IDEAS
    4. Ruth V. Aguilera & Kurt A. Desender & Mónica López-Puertas Lamy & Jun Ho Lee, 2017. "The governance impact of a changing investor landscape," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(2), pages 195-221, February.
    5. repec:eee:jfinec:v:126:y:2017:i:1:p:171-199 is not listed on IDEAS
    6. Roberto Alvarez & Mauricio Jara & Carlos Pombo, 2017. "Do institutional blockholders influence corporate investment? Evidence from emerging markets," DOCUMENTOS CEDE 015767, UNIVERSIDAD DE LOS ANDES-CEDE.
    7. repec:oup:rfinst:v:29:y:2016:i:12:p:3394-3427. is not listed on IDEAS
    8. Ian R. Appel & Todd A. Gormley & Donald B. Keim, 2016. "Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism," NBER Working Papers 22707, National Bureau of Economic Research, Inc.
    9. Lof, Matthijs & Bommel, Jos van, 2018. "Asymmetric information and the distribution of trading volume," Research Discussion Papers 1/2018, Bank of Finland.
    10. repec:eee:jfinec:v:124:y:2017:i:2:p:285-306 is not listed on IDEAS
    11. Li, Ting & Zaiats, Nataliya, 2017. "Information environment and earnings management of dual class firms around the world," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 1-23.
    12. repec:oup:rfinst:v:29:y:2016:i:12:p:3245-3277. is not listed on IDEAS
    13. Schoenfeld, Jordan, 2017. "The effect of voluntary disclosure on stock liquidity: New evidence from index funds," Journal of Accounting and Economics, Elsevier, vol. 63(1), pages 51-74.
    14. repec:spr:reaccs:v:22:y:2017:i:3:d:10.1007_s11142-017-9408-0 is not listed on IDEAS
    15. Appel, Ian R. & Gormley, Todd A. & Keim, Donald B., 2016. "Passive investors, not passive owners," Journal of Financial Economics, Elsevier, vol. 121(1), pages 111-141.
    16. Roberto Álvarez & Mauricio Jara-Bertín & Carlos Pombo, 2016. "Do institutional investors unbind firm financial constraints? Evidence from emerging markets," DOCUMENTOS CEDE 015114, UNIVERSIDAD DE LOS ANDES-CEDE.
    17. Paul Borochin & Jie Yang, 2016. "The Effects of Institutional Investor Objectives on Firm Valuation and Governance," Finance and Economics Discussion Series 2016-088, Board of Governors of the Federal Reserve System (U.S.).
    18. Kiesewetter, Dirk & Manthey, Johannes, 2017. "The relationship between corporate governance and tax avoidance - evidence from Germany using a regression discontinuity design," arqus Discussion Papers in Quantitative Tax Research 218, arqus - Arbeitskreis Quantitative Steuerlehre.

    More about this item

    Keywords

    Institutional investors; Indexing; Information asymmetry; Voluntary disclosure; Earnings forecasts;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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