Abstract: We investigate whether sophisticated investors obtain information about Securities and Exchange Commission (SEC) comment letters before the public release date. Specifically, we examine mutual fund trading behavior around dates firms receive a comment letter. We find significant abnormal net selling by mutual funds immediately after a firm receives a comment letter. Additional tests find that abnormal net selling is greater when firms receive a second-round letter, where information leakage is more likely (e.g., firms with high board member connectedness and higher dedicated institutional ownership) and when comment letters address more critical issues (e.g., the need to restate prior results or related party transactions). We also find that funds with high abnormal net selling in the private phase avoid significant future share price declines. In sum, we find consistent evidence that mutual funds appear to trade on information obtained during the private phase of the SEC comment letter process..
Published Version

Abstract: We investigate whether sophisticated investors’ trading concentration in the auto industry is associated with their use of auto complaint data. We find that the extent to which mutual funds concentrate their trading in the auto industry is positively associated with their incorporation of the complaint information into their trading decisions both before and after auto recall announcements. We provide evidence that trading concentration by mutual funds is more consistent with the information advantage explanation rather than behavioral explanations for concentration such as overconfidence or familiarity. However, we find that pension funds, regardless of their level of trading concentration, do not use the customer complaint information to inform their trading decisions. Our findings suggest that pension funds concentrate trading for reasons other than short-term information advantage, suggesting that the underlying reason for trading concentration can differ by the type of institutional investor.
Published Version

Abstract: This study explores the association between individual investor information demand and two measures of market uncertainty – aggregate market uncertainty and disaggregate industry-specific market uncertainty. It extends the literature by being the first to empirically examine investor information demand and disaggregate market uncertainty.This paper constructs a measure of information search by using the Google Search Volume Index and computes measures of aggregate and disaggregate market uncertainty using institutional investors' trading data from Ancerno Ltd. The relation between market uncertainty, as measured by trading disagreements among institutional investors, and information search is analyzed using an OLS (Ordinary Least Squares) regression model. This paper finds that individual investor information demand is significantly and positively correlated with aggregate market uncertainty but not associated with disaggregated industry uncertainty. The findings suggest that individual investors may not fully incorporate all relevant uncertainty information and that ambiguity-related market pricing anomalies may be more associated with disaggregate market uncertainty
Published Version

Abstract: This analysis is the first to explore the overall roles of the offsetting attraction and distraction influences of earnings news in shaping the level of attention given to the equity market by market participants. This analysis is the first to explore the overall roles of the offsetting attraction and distraction influences of earnings news in shaping the level of attention given to the equity market by market participants. Specifically, we examine how the number of earnings announcement activity affects investor attention as measured by trading volume given to the set of non-announcing firms. We find that while earnings announcement numbers lower trading volume responses to earnings news among announcing firms (consistent with Hirshleifer et al., 2009), their distractive influence does not carry over into the market as a whole. More importantly, investor attention to both the overall market and the larger subset of non-announcing firms increase in response to earnings news activity levels. However, after decomposing the announcers as same-industry and different-industry announcers, we find that investor attention to the non-announcing segment of the market increases with the number of same-industry announcers, but actually seems to decrease (i.e. they distract attention) with the number of different-industry announcers. We also find that the associated earnings surprise brings attention to non-announcing firms (consistent with earnings news is relevant to overall market price movements). Finally, we find that distraction effects are attenuated in the financial crisis period.
Published Version

Abstract: We contribute to auditing literature by examining trading behavior of mutual and pension funds around first-time going concern modified opinions (GCMO). We find that mutual funds are significant net sellers of GCMO firms in the period before the GCMO announcement and then decrease their net selling at the GCMO announcement. In contrast, pension funds appear to be less active net sellers in the pre-GCMO period and then significantly increase their net selling as an immediate response to the GCMO announcement, and then reduce their net selling in the post-GCMO period. Our net selling results are robust to a battery of additional tests, including alternative specifications of the GCMO event window, using an extended pre-GCMO benchmark period, controlling for 8-K and earnings announcements, excluding subsequently bankrupt firms and using change variables in our models. In additional analyses, we find that overall trading volume increases for both mutual a nd pension funds at the GCMO announcement. Our examination of trading behavior provides initial evidence on differences between these two groups of institutional investors in their trading response to first-time GCMOs, and enables us to provide a more robust assessment of the information content of GCMOs for these different groups of sophisticated market participants.
Published Version

Abstract: Using a comprehensive sample of customer complaints filed with the National Highway Traffic Safety Administration, we examine the differences in the timing of insiders’ and investors’ use of outside generated public information. We first find that levels of customer complaints predict future auto recalls and their financial consequences, suggesting that these publicly available customer complaints contain value-relevant information. We then find that customer complaints are not contemporaneously associated with stock returns but predict large negative abnormal stock returns during the period following the recall announcement. Thus, we find that the market generally fails to impound the information contained in customer complaints in a timely manner. We then examine whether mutual funds, as sophisticated investors, appear to use the complaint data and find that, consistent with the overall market, in the aggregate they do not appear to use the complaint data to inform their trades until after recall announcements. However, mutual funds that focus more of their trades in the auto industry appear to pay more attention to the complaint data and trade consistent with the data before recall announcements. We then find that the top five executives of the car manufacturers in our sample are significant sellers of personal shares prior to the announcement of auto recalls, particularly when customer complaints are high. Our findings suggest that insiders’ informational advantage is at least in part due to general investor limited attention to publicly available information.
Published Version

Abstract: The purpose of this paper is to examine whether institutional investors: 1) anticipate a distressed firm’s receipt of a first-time going concern modified audit opinion, and 2) react to a first-time going concern modified opinion by engaging in abnormal net selling of firm shares. Using a proprietary database of U.S. institutional investor trades, we find that institutional investors are net sellers of first-time going concern opinion firms beginning six months before the release of the report and remain net sellers through the subsequent three months. We also find that the severity of the reasons auditors modify their opinions is associated with increased trading activity, but only after the opinion is publicly available. Our results support the position that an auditor’s going concern modified opinion is influential in the marketplace by documenting that institutional investors anticipate this price-relevant information and react through increased selling. The finding of increased net selling of firms with more severe reasons for report modifications provides evidence of the incremental informational value of the wording in the modified opinion.
Paper Published Version

Abstract: We examine whether ambiguity in the market leads to an increase in information demand by individual investors. Drawing on the asset-pricing model proposed by Mele and Sangiorgi (2015), which incorporates market ambiguity, we measure individual information demand using daily Google searches and measure market ambiguity using a metric based on the market trades of institutional investors. We find that individual investors increase their information demand during periods of greater market ambiguity. We also provide evidence that information demand from individual investors spikes around earnings announcement days primarily when market uncertainty is driven by net-selling activity. Overall, these results suggest that the disagreement among institutional investors either represents uncertainty or contributes to the uncertainty related to a stock, leading to increased demand for information from individual investors.
Published Version

Abstract: Despite substantial evidence that foreign direct investment (FDI) is influenced by taxation, the impact of bilateral tax treaties on FDI is surprisingly unclear. We provide a simple theoretical framework illustrating why the impact of tax treaties may be heterogeneous across the distribution of FDI, and thus why focusing on the average effect of tax treaties may be misleading. We then assess the empirical relevance of such heterogeneity by estimating the quantile treatment effects of tax treaties on US inbound and outbound FDI using panel data from 1980–1999. Our results are striking, and consistent with our expectations. We obtain positive effects of tax treaties at lower quantiles of the distribution of FDI, but negative effects in the upper quantiles. Moreover, while the negative effects are substantially larger in absolute terms relative to the positive effects, the two effects are roughly equivalent in percentage terms.
Published Version

Abstract: The use of observed transaction sizes to differentiate between “small” and “large” investor trading patterns is widespread. A significant concern in such studies is spurious effects attributable to misclassification of transactions, particularly those originating from large investors. Such effects can arise unintentionally, strategically, or endogenously. We examine comprehensive records of a sample of institutional investors (i.e., “large” traders), including their order sizes and overall position changes, to assess the degree to which such misclassifications give rise to spurious inferences about “small” and “large” investor trading activities. Our analysis shows that these institutions are heavily involved in small transaction activity. It also shows that they increase their order sizes substantially in announcement periods relative to nonannouncement periods, presumably as an endogenous response to earnings news. In the immediate earnings announcement period, transaction size-based inferences about directional trading are quite misleading—producing spurious “small trader” effects and, more surprisingly, erroneous inferences about “large trader” activity.
Published Version

Abstract: Despite substantial evidence that foreign direct investment (FDI) is influenced by taxation, the impact of bilateral tax treaties on FDI is surprisingly unclear. We investigate one possible reason: previous empirical research restricts treaties to have a one-time, discrete effect on FDI. We find this assumption to be rejected in the data on US inbound FDI. Moreover, allowing for anticipatory and lagged effects of treaty formation indicates a more substantial, positive effect on FDI activity..
Paper Published Version

Abstract: This study is motivated by the fragmented examination of institutional investors' roles in information discovery, response, and analysis around corporate news events. We aim to provide a holistic understanding of these roles and their interplay around quarterly earnings announcements. Building upon prior evidence linking superior performance in concentrated holdings to information advantage, we also explore the influence of industry concentration on these roles. Our results show that institutional investors allocate a substantial proportion of their trading activity towards information analysis, focus on firms likely to report positive news during the discovery phase, and respond more promptly to positive news than negative news. Higher industry concentration enhances their engagement in information discovery, response, and analysis, particularly for positive earnings surprises. In summary, our study's comprehensive approach sheds light on institutional investors' roles in information discovery, interpretation, and analysis. Furthermore, we explore the impact of industry concentration on their proficiency in these roles, ultimately offering a comprehensive understanding of how institutional investors collectively contribute to enhancing overall market efficiency.
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