In this dissertation, I use a unique data set to address three questions related to the timing of loss realizations by institutional investors. The data include clienteles and quarterly holdings of investment advisers, whom I classify as "tax-sensitive" if their clients are primarily high net-worth individuals and as "tax-insensitive" if their clients are primarily tax-exempt entities or individuals with tax-deferred accounts. Prior empirical studies attribute abnormal stock return patterns around calendar year-end (the "January effect") to individual investors' tax-loss-selling and to institutional investors' window-dressing. In chapter two, I examine whether investment advisers contribute to the January effect via tax-loss-selling rather than via windowdressing. I find that tax-sensitive advisers' year-end sales of loss stocks (but not those of tax-exempt client advisers whose detailed disclosures to clients provide more incentive to window-dress) are associated with abnormally low (high) returns at the end of December (beginning of January). These results suggest that investment advisers contribute to the January effect via tax-loss-selling rather than via window-dressing. In chapter three, I examine whether tax-sensitive advisers respond to holding period incentives at year-end. Under U.S. tax law, net short-term gains are taxed as ordinary income, while net long-term gains are taxed at a lower rate. Prior studies find little or no response to holding period incentives by individual investors. In contrast, tax-sensitive advisers are more likely to sell stocks with short-term losses the larger the difference between the current short-term loss deduction and what the long-term loss deduction would be. In chapter four, I examine whether, like individual investors, tax-sensitive advisers realize their losses at year-end because they exhibit the "disposition effect," or the tendency to realize gains at a quicker rate than losses, earlier in the year. I compare the likelihood of advisers' realizations of "losers" (stocks the cumulative return of which over the prior nine months is negative) to the likelihood of their realizations of "winners" (stocks the cumulative return of which over the prior nine months is positive) by calendar quarter. Tax-insensitive, but not tax-sensitive, advisers exhibit the disposition effect, suggesting that tax incentives combined with investor sophistication prevent the disposition effect. / text

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This dissertation consists of three essays on the role of social values in financial markets. Chapter 1 uses geographic variation in religious concentration to identify the effect of people's gambling behavior in financial market settings. We argue that religious background predicts people's gambling propensity, and that gambling propensity carries over into their behavior in financial markets. We test this conjecture in various financial market settings and find that the predominant local religion predicts variation in investors' propensity to hold stocks with lottery features, in the prevalence of broad-based employee stock option plans, in first-day returns to initial public offerings, and in the magnitude of the negative lottery-stock return premium. Collectively, our findings indicate that religious beliefs regarding the acceptability of gambling impact investors' portfolio choices, corporate decisions, and stock returns. In Chapter 2 I examine the impact of social norms against holding certain types of stocks (e.g. "sin stocks", or stocks with lottery features) on trading decisions and portfolio performance. I argue that trades which deviate from social norms are likely to reflect stronger information. Consistent with this hypothesis, I find that the most gambling-averse institutions earn high abnormal returns on their holdings of lottery stocks, outperforming the holdings of the most gambling-tolerant institutions. An analysis of institutions' sin stock holdings provides complementary evidence using another dimension of social norms, supporting the hypothesis that trades which deviate from norms reflect stronger information. In the third essay, we conjecture that people feel more optimistic about the economy and stock market when their own political party is in power. We find supporting evidence from Gallup survey data and analyze brokerage account data to confirm the impact of time-varying optimism on investors' portfolio choices. When the political climate is aligned with their political preferences, investors maintain higher systematic risk exposure while trading less frequently. When the opposite party is in power, investors exhibit stronger behavioral biases and make worse investment decisions. Investors improve their raw portfolio performance when their own party is in power, but the risk-adjusted improvement is economically small. / text

The role of information is central to the study of corporate finance. In the real world where one party usually has more and better information, information asymmetry forms the basis of analysis in many key aspects of modern economics including contract theory and principle-agent problems. Although technology facilitates information flow, information continues to play an important role because we live in an environment in which there is more information and information that is more complex. Moreover, we are experiencing a fundamental shift towards a knowledge-based economy in which ideas and concepts, both in the form of information, gain importance. This thesis examines the role of information as we make this transition in two separate settings: First in a “real impact” setting where knowledge generated at leading research universities spills over into firms nearby, and second, in a "traditional market" setting where analysts help disseminate information. In the post-industrial economy of the 21st century, innovation is the engine of economic growth. As a result, we increasingly value human capital and knowledge. Chapter 2 looks at the location of firms relative to knowledge centers and its impact on stock volatility. I argue that knowledge spillovers foster firm R&D and find supporting evidence. My evidence is consistent with the classic models on the impact of human capital on economic growth (Nelson and Phelps, 1966). Chapter 3 examines the impact of knowledge and innovation on firms’ cash management policies. Bates, Kahle, and Stulz (2009) find that the average cash-to-assets ratio for firms more than doubles in the past decades and attribute it to changing firm characteristics. I identify innovation as a driving force behind these changes, resulting in firms holding more cash as a precaution. In Chapter 4, I study the investment value of information from analysts, or more specifically, analyst target prices. Due to potential conflicts of interest problems, the value that analysts provide to investors remains controversial. Moreover, since the information age is characterized by information overload, it is harder for investors to identify relevant information. I find that institutions trade in the same direction as the consensus target price movement. / Thesis (Ph.D, Management) -- Queen's University, 2012-03-07 14:20:20.178

In this dissertation, I investigate the impact of institutional investors on security prices and corporate policies, and offer a new perspective on the vital role that institutional investors play in the modern capital market. Specifically, on the impact on security price movements, I design a new measure of stock-level sentiment based on mutual fund publically disclosed portfolio information and provide a new dimension to better predict stock returns. A trading strategy based on the new sentiment metrics can generate an annualized alpha of 21.27%. The abnormal returns cannot be explained by the time-varying expected returns and transaction costs, and can be best explained by mutual fund overreactions. Hence, my findings can be interpreted as a new anomaly in a new era-when institutional investors are the marginal traders. On the impact on corporate policy side, I document two pieces of new empirical evidence on the importance of long-term institutional holdings: the entrenchment effect of long-term institutional holdings in the context of corporate financing decisions and the active monitoring role of long-term institutional investors in the context of international firms’ accounting qualities. Combined with previous studies which favour a long-term institutional investor, the evidence on the cost side of long-term holding I document here can serve as the first call for an optimal investment horizon for firms operating in the U.S. / Thesis (Ph.D, Management) -- Queen's University, 2012-04-11 22:22:17.627

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In this dissertation, I study the influence of monitoring by institutional investors on corporate behavior within the context of CEO compensation-based incentives. I find that institutional investors provide an executive with higher levels of compensation sensitivity with respect to a firm’s equity price (Delta). In contrast to prior literature, however, once I control the dynamic nature of the data, institutional investors do not affect compensation sensitivity with respect to a firm’s equity risk (Vega). Instead, I find that institutional investors appear to influence the risk profile of firm through the firm’s investment, financing and diversification policy choices even after I control for the CEO’s compensation structure. The results suggest that compensation-related incentives to increase risk (i.e. vega) and monitoring by institutional investors are substitutes of each other in that both can offset the managerial incentives to reduce risk that stem from greater levels of compensation delta. These results are robust to potential endogeneity problems that may arise due to the dynamic nature of panel data.

Chapter 2 undertakes a new investigation of the potential for options to mitigate short sale constraints, conducing two event studies which examine 1732 option introductions and the differential effect of the 2008 short sale ban on optioned and non-optioned stocks. I find option introduction mitigates 79% of the price adjustment efficiency disparity between short sale constrained and unconstrained stocks in relation to negative news. I also find evidence that negative information was incorporated more freely into optioned stocks during the short sale transaction ban of financial sector stocks. These results collectively suggest that in the presence of binding short sale constraints, options act as an effective substitute to short sales, significantly contributing to the informational efficiency of the market. In Chapter 3 we examine the determinants of success of foreign cross-listings in the U.S. using cumulative returns surrounding the cross-listing event and liquidity on the U.S. exchange as joint metrics of success. We find that the post-listing liquidity and valuation benefits of cross-listings are crucially dependent both on prior home-market success and on U.S. institutional holdings in the cross-listing quarter. Stocks with greater institutional ownership upon cross-listing see more liquid U.S. trading. Additionally, firms with a higher abnormal price run-up in the year prior to cross-listing and firms that see more liquid domestic trading enjoy greater post-listing liquidity in the U.S. Chapter 4 examines the asset allocation decisions of mutual fund investors, focusing on flight to quality considerations. Using the default spread, term spread and short term interest rate as proxies for economic conditions, we find that an expected improvement (deterioration) in Canadian economic conditions causes investors to direct flow away from (towards) fixed income-type funds and towards (out of) equity based funds. For example, a one standard deviation increase in the term spread (1.13%) results in an 84% increase and a 74% decrease in the percentage of flow directed at Canadian equity and money market funds respectively, relative to the previous month. / Finance

By describing investors' decision-making processes and actions, this thesis provides a background to the share prices that millions of people follow closely everyday. It focuses on the reasons for institutional investors' investment actions on the stock market, and in particular the role of financial information about the quoted companies. Interviews and document studies linked to a large number of actual investment actions in eight large Swedish institutional investor organisations constitute the empirical basis of the thesis. Important empirical results concern how action based on fundamental opinions about investment objects is restricted or reinforced by investor contexts and market premises, the role of valuation models and quantitative analysis in comparison with qualitative judgements, and how uncertainty is dealt with during investment decision-making processes. Non-public information played an essential role in forming the fundamental opinions about companies/equities. In addition, this information could help trigger equity investment actions. Several factors, some of them organisational, contributed to time lags between the first impulse and the completed investment transaction.The results also suggest that the institutional investors in this study did not take action independently of other investors. Furthermore, they did not develop their fundamental opinions about investment objects independently of other market participants - to varying extents they adjusted to other market participants' expectations, equity valuation methods and ways of using accounting figures. / Diss. Stockholm : Handelshögsk.

The objective of the thesis is to examine the trading behaviour and characteristics of retail and institutional traders on the Australian Stock Exchange. There are three aspects of these traders that are of particular interest to this study: (1) the information content of their trades, (2) their order placement strategies, and (3) the impact of their trading on share price volatility. Trades made on the basis of private information such as those by institutional traders are found to be associated with larger permanent price changes while trades by uninformed traders such as retail traders are found to be associated with smaller changes. In addition, institutional trades are found to have smaller total price effect compared to retail trades suggesting retail traders incur higher market impact costs. In order to profit from potentially short-lived information advantage, informed traders are expected to place more aggressive orders. The analysis of the order price aggressiveness showed institutions are more aggressive than other traders. In addition, retail traders are found to be less aware of the state of the market when placing aggressive orders. The analysis of the limit order book found significant differences between the contributions of institutional and retail traders to the depth of the limit-order book, with retail standing limit orders further from the market. This is consistent with the conjecture that uninformed traders such as retail traders have greater expected adverse selection costs. The effect of trading by retail and institutional traders on price volatility are also investigated. There is some evidence that retail traders are more active and institutional traders are proportionally less active after periods of high volatility. Also, the effect of the order activity from different trader types on volatility differs depending on the measure of order activity used.