XXV Edition

1-2 December 2016"

Firms’ Market Culture: The Role of Institutional Ownership, Earnings Management and Crash Risk

Harris Terry, Durham University
Philip Dennis, Durham University
Andreou Panayiotis C., Cyprus University of Technology and Durham University
Fiordelisi Franco, University of Rome III

The market culture is shaped from firm attributes that focus on achieving rapid and short-term value creation. Using textual analysis for a large sample of US publicly-listed firms, this study investigates whether the composition of the institutional investor base impacts a firm’s orientation towards the market culture. The findings show that transient institutional ownership propels a firm’s orientation towards the market culture, while dedicated institutional ownership pulls it away. Further, firms with stronger market culture orientation have a heightened propensity to engage in earnings management practices and are more prone to stock price crashes. This is indicative of the fact that firms with a greater market culture orientation face higher incentives to meet predetermined objectives and expectations by masking poor performance through managerial bad news hoarding. Our results have policy implications, since they support the notion that transient institutional investors pressurize management to shift a firm’s orientation more towards the market culture so as to maximize short-run profits, albeit at the expense of long-run value.

Area: Capital Structure and Corporate Finance

Keywords: Corporate culture; Institutional ownership; Earnings management; Crash risk; Firm value

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