IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v19y2014i2d10.1007_s11142-013-9271-6.html
   My bibliography  Save this article

Evidence from impending bankrupt firms that long horizon institutional investors are informed about future firm value

Author

Listed:
  • Santhosh Ramalingegowda

    (University of Georgia)

Abstract

A key assumption in many accounting and finance studies is that long horizon institutional investors are informed shareholders. Yet past empirical research finds no evidence that these institutions anticipate major corporate events, including earnings-based events. I find that long horizon institutions are better informed in that they sell more shares of impending bankrupt firms than of matched distress firms at least one quarter ahead of bankruptcy. Share sales are greater in impending bankrupt firms whose shareholders ultimately lose all of their equity. In additional analyses, I document greater share sales by long horizon institutions with supposedly superior information processing abilities and/or access to corporate management. Share sales are significantly less in the post Regulation FD era. Overall, my findings support the validity of the common assumption that long horizon institutions are informed. Regulation FD appears to mitigate (but not eliminate) their information advantage.

Suggested Citation

  • Santhosh Ramalingegowda, 2014. "Evidence from impending bankrupt firms that long horizon institutional investors are informed about future firm value," Review of Accounting Studies, Springer, vol. 19(2), pages 1009-1045, June.
    • Handle: RePEc:spr:reaccs:v:19:y:2014:i:2:d:10.1007_s11142-013-9271-6
    DOI: 10.1007/s11142-013-9271-6
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-013-9271-6
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-013-9271-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Michael E. Porter, 1992. "Capital Choices: Changing The Way America Invests In Industry," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(2), pages 4-16, June.
    2. Paul A. Gompers & Andrew Metrick, 2001. "Institutional Investors and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 229-259.
    3. Michael C. Jensen, 2010. "Active Investors, LBOs, and the Privatization of Bankruptcy," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 77-85, January.
    4. Xuemin (Sterling) Yan & Zhe Zhang, 2009. "Institutional Investors and Equity Returns: Are Short-term Institutions Better Informed?," The Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 893-924, February.
    5. repec:bla:jfinan:v:44:y:1989:i:4:p:1059-75 is not listed on IDEAS
    6. Gilson, Stuart C., 1990. "Bankruptcy, boards, banks, and blockholders : Evidence on changes in corporate ownership and control when firms default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 355-387, October.
    7. Stephen A. Hillegeist & Elizabeth K. Keating & Donald P. Cram & Kyle G. Lundstedt, 2004. "Assessing the Probability of Bankruptcy," Review of Accounting Studies, Springer, vol. 9(1), pages 5-34, March.
    8. Paul Hribar & Nicole Jenkins & Juan Wang, 2009. "Institutional investor and accounting restatement," Asian Journal of Finance & Accounting, Macrothink Institute, vol. 1(2), pages 75105-75105, December.
    9. Brian J. Bushee & Michael J. Jung & Gregory S. Miller, 2011. "Conference Presentations and the Disclosure Milieu," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 49(5), pages 1163-1192, December.
    10. Kenneth A. Froot & Andre F. Perold & Jeremy C. Stein, 1992. "Shareholder Trading Practices And Corporate Investment Horizons," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(2), pages 42-58, June.
    11. Brian J. Bushee, 2001. "Do Institutional Investors Prefer Near†Term Earnings over Long†Run Value?," Contemporary Accounting Research, John Wiley & Sons, vol. 18(2), pages 207-246, June.
    12. Bin Ke & Kathy Petroni, 2004. "How Informed Are Actively Trading Institutional Investors? Evidence from Their Trading Behavior before a Break in a String of Consecutive Earnings Increases," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 42(5), pages 895-927, December.
    13. repec:bla:jfinan:v:53:y:1998:i:4:p:1335-1362 is not listed on IDEAS
    14. Bushee, BJ & Noe, CF, 2000. "Corporate disclosure practices, institutional investors, and stock return volatility," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 38, pages 171-202.
    15. Seyhun, H Nejat & Bradley, Michael, 1997. "Corporate Bankruptcy and Insider Trading," The Journal of Business, University of Chicago Press, vol. 70(2), pages 189-216, April.
    16. Froot, Kenneth A & Scharftstein, David S & Stein, Jeremy C, 1992. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," Journal of Finance, American Finance Association, vol. 47(4), pages 1461-1484, September.
    17. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    18. Brian J. Bushee & Theodore H. Goodman, 2007. "Which Institutional Investors Trade Based on Private Information About Earnings and Returns?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 45(2), pages 289-321, May.
    19. Ke, Bin & Ramalingegowda, Santhosh, 2005. "Do institutional investors exploit the post-earnings announcement drift?," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 25-53, February.
    20. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 18(1), pages 109-131.
    21. Clark, Truman A & Weinstein, Mark I, 1983. "The Behavior of the Common Stock of Bankrupt Firms," Journal of Finance, American Finance Association, vol. 38(2), pages 489-504, May.
    22. Gentry, Ja & Newbold, P & Whitford, Dt, 1985. "Classifying Bankrupt Firms With Funds Flow Components," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 23(1), pages 146-160.
    23. Ke, Bin & Huddart, Steven & Petroni, Kathy, 2003. "What insiders know about future earnings and how they use it: Evidence from insider trades," Journal of Accounting and Economics, Elsevier, vol. 35(3), pages 315-346, August.
    24. Bin Ke & Kathy R. Petroni & Yong Yu, 2008. "The Effect of Regulation FD on Transient Institutional Investors' Trading Behavior," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 46(4), pages 853-883, September.
    25. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-124, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cheung, Kwok Tong Samuel & Fung, Simon Yu Kit & Raman, K.K. & Shen, Jianfu, 2025. "Clawback adoptions and institutional investment decisions," Journal of Corporate Finance, Elsevier, vol. 91(C).
    2. Duan, Rui & Larkin, Yelena, 2025. "Short-term institutional investors and the diffusion of supply chain information," Journal of Empirical Finance, Elsevier, vol. 81(C).
    3. Bin Ke & Kathy R. Petroni & Yong Yu, 2008. "The Effect of Regulation FD on Transient Institutional Investors' Trading Behavior," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 46(4), pages 853-883, September.
    4. Baik, Bok & Kang, Jun-Koo & Kim, Jin-Mo, 2010. "Local institutional investors, information asymmetries, and equity returns," Journal of Financial Economics, Elsevier, vol. 97(1), pages 81-106, July.
    5. Benkraiem, Ramzi & Goutte, Stéphane & Saadi, Samir & Zhu, Hui & Zhu, Steven, 2022. "Investor heterogeneity and negative skewness in stock returns: Evidence from institutional investors," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    6. Guanming He, 2021. "Credit rating, post‐earnings‐announcement drift, and arbitrage from transient institutions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(7-8), pages 1434-1467, July.
    7. Anzhela Knyazeva & Diana Knyazeva & Leonard Kostovetsky, 2018. "Investor heterogeneity and trading," European Financial Management, European Financial Management Association, vol. 24(4), pages 680-718, September.
    8. Maffett, Mark, 2012. "Financial reporting opacity and informed trading by international institutional investors," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 201-220.
    9. Gu, Xin & Ying, Shan & Wang, Liangliang & Yu, Zhen & Sharma, Susan Sunila, 2021. "A new estimation of institutional informed trading and firm transparency: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    10. Alexandre Garel & Arthur Petit-Romec, 2021. "Engaging Employees for the Long Run: Long-Term Investors and Employee-Related CSR," Journal of Business Ethics, Springer, vol. 174(1), pages 35-63, November.
    11. Bin Ke & Kathy Petroni, 2004. "How Informed Are Actively Trading Institutional Investors? Evidence from Their Trading Behavior before a Break in a String of Consecutive Earnings Increases," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 42(5), pages 895-927, December.
    12. Ching-Lung Chen & Chung-Yu Chen, 2018. "Do Weak Internal Controls Affect Institutional Ownership Decisions?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(03), pages 1-37, September.
    13. Da‐Hea Kim, 2022. "Investment horizon and option market activity," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(5), pages 923-958, May.
    14. Doina Chichernea & Collin Gilstrap & Kershen Huang & Alex Petkevich, 2019. "Who Reacts to News?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 1-43, March.
    15. Mariassunta Giannetti & Xiaoyun Yu, 2021. "Adapting to Radical Change: The Benefits of Short-Horizon Investors," Management Science, INFORMS, vol. 67(7), pages 4032-4055, July.
    16. Francois Brochet & Maria Loumioti & George Serafeim, 2015. "Speaking of the short-term: disclosure horizon and managerial myopia," Review of Accounting Studies, Springer, vol. 20(3), pages 1122-1163, September.
    17. Ghaly, Mohamed & Dang, Viet Anh & Stathopoulos, Konstantinos, 2020. "Institutional investors' horizons and corporate employment decisions," Journal of Corporate Finance, Elsevier, vol. 64(C).
    18. Ryan P. McDonough, 2023. "Corporate communication and shareholder base retention: evidence from spin-offs," Review of Quantitative Finance and Accounting, Springer, vol. 60(4), pages 1283-1327, May.
    19. Sakaki, Hamid & Jory, Surendranath & Jackson, Dave, 2021. "Institutional investors’ ownership stability and their investee firms’ equity mispricing," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    20. Marcus Kirk & Zhenhao Jeffery Piao, 2025. "Investor-firm private interactions and informed trading: Evidence from New York City taxi patterns," Review of Accounting Studies, Springer, vol. 30(2), pages 1136-1174, June.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:19:y:2014:i:2:d:10.1007_s11142-013-9271-6. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.