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

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

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 incorporate the complaint information into their trading decisions is positively associated with their concentration of trading in the auto industry. We provide direct evidence that information advantage can arise from superior information processing. 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 information advantage
Paper

Abstract: Whether the auditor’s going concern modified opinion (GCMO) provides information to the market remains an important and unresolved empirical issue. We contribute to this literature by examining trading behavior of mutual and pension funds around first-time GCMOs. We find that mutual funds increase their net selling in the period just prior to the GCMO, but not at the GCMO announcement; however, they significantly increase trading volume at the announcement. In contrast, pension funds appear to be less active in the pre-GCMO period and then significantly increase their net selling, but not trading volume, at the GCMO announcement. Both fund types engage in higher net selling of subsequently bankrupt firms in the year preceding the GCMO and in the period after the GCMO announcement compared to subsequently viable firms. Our results are robust to a battery of additional tests, including examining only GCMOs announced after earnings announcements, and controlling for the severity of GCMOs as well as other news events during our announcement period. Our examination of trading behavior provides evidence on differences between these two groups in their pre-GCMO trading and their response to the GCMO, and enables us to provide a robust assessment of any information content of GCMOs.
Paper

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. In terms of overall attention we find that amount of earnings news arriving at the market is positively associated with higher levels of market attention. Interestingly, however, after splitting the overall market as announcers and non-announcers, we document that news announcements in related industries bring attention to the larger set of non-announcers while news in dissimilar industries distracts attention away from the non-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). Moreover, we document that the distractive aspects of earnings are, from an overall market perspective, less influential than the attention attracting aspects of earnings. Finally, we find that distraction effects are attenuated in the financial crisis period. "
Paper

Abstract: Using a comprehensive sample of customer complaints, we find that customer complaints predict future auto recalls and their financial consequences. Further, customer complaints are not contemporaneously associated with stock returns but predict large negative abnormal stock returns during the period following the recall announcement date, suggesting that stock prices reflect the information content of customer complaints with a delay. However, we find a positive relation between net insider selling and customer complaints prior to the announcement of auto recalls. Our findings suggest that insiders’ informational advantage is at least in part due to investors’ limited attention to publicly available information.
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