Research
The Value of Undiversified Shareholder Engagement
Abstract
This paper sheds new light on the impact of corporate monitoring by institutional investors. I show that investors with large proportions of their portfolio allocated to a firm, which I term high “portfolio-at-risk” (PAR) institutions, are effective monitors. Textual analysis of more than 200,000 corporate conference calls shows that higher PAR is associated with greater shareholder engagement and smaller institutional investors with high PAR engage as much, if not more, as blockholders with low PAR. Correspondingly, firms owned by high-PAR investors have higher profits and valuations relative to those owned by large, diversified shareholders. Highlighting the importance of high-PAR institutions for corporate monitoring, I document that a reduction in creditor monitoring entails lower profits and valuations but only for firms with low-PAR institutional ownership. These findings suggest a revisit of much extant academic and policy work concerning the drivers and implications of institutional shareholder engagement.
Binned scatter plot illustrating the mean of firms' Return on Assets at time t for each decile of firms' top five PAR institutions' average PAR at time t-1. Return on Assets is a firm's operating profit before depreciation normalized by its total assets. Top five PAR institutions – PAR, is the dollar value of an institutional investor's holding in a firm normalized by that investor's total portfolio value, averaged over a firm's top-five institutional investors as per this measure. The red vertical lines indicate 95% confidence bounds around the mean.
Abstract
Using plausibly exogenous variation in the ability to short-sell, we provide evidence that public information is predominantly impounded into prices via trade. Studying the role of trade in the context of publicly-observed cash flow news, we find that only 6% of total price discovery is realized on announcement days with low trade. A portfolio strategy that focuses on stocks with high announcement-day trade yields monthly alpha of 2.46%. In contrast to the predictions of the literature on no-trade equilibria, our evidence suggests that trade plays a significant role in price discovery.
Price discovery over time as a function of announcement day trade measured via the mean cumulative abnormal return for firms in the lowest, i.e., most negative, decile of cash flow news each quarter. The blue and orange lines represent stocks that experience high and low announcement day trade, based on quarterly sorts, respectively. Time series separated between announcement day (left of grey shading) and post-announcement period (right).
Abstract
We develop a baseline model to understand how financial frictions impact industry dynamics. Using state of the art computational tools, we document how key characteristics, such as market size and product differentiation, determine the impact of financing on firms' price and investment strategies, as well as industry dynamics and welfare. We show that investment and prices tend to move in opposite directions, while long run industry concentration generally rises. Strikingly, financing frictions sometimes lead firms to both invest more and charge lower prices. In turn, this behavior often raises consumer surplus and social welfare, even if industry concentration increases.
Scatter plot over all parameterizations, illustrating financial frictions increase investment (y-axis) against financial frictions decrease price (x-axis) overlayed by a linear regression line.