Dissertation
Institutional investors and financial statement analysis
Washington State University
Doctor of Philosophy (PhD), Washington State University
05/2009
DOI:
https://doi.org/10.7273/000005803
Abstract
My dissertation consists of two essays related to institutional investors and financial statement analysis. In the first paper, we examine whether institutional investors follow each other into and out of the same industries. Our empirical results reveal strong evidence of institutional industry herding. The cross-sectional correlation between the fraction of institutional traders buying an industry this quarter and the fraction buying last quarter, for example, averages 40%. Additional tests suggest that correlated signals primarily drive institutional industry herding. Our results also provide empirical support for style investing models. The second paper investigates the relation between changes in financial health, subsequent returns, and demand by individual and institutional investors to differentiate between the rational and irrational pricing explanation for why financial statement based analysis predicts the future returns. Recent studies show changes in financial health forecast future returns. Piotroski (2000, 2005) and Fama and French (2006) point out that there are two potential explanations for this predictability. First, a riskier firm (with a higher expected return) must have higher expected income growth to justify the same book-to-market ratio as a safer firm. Thus, controlling for book-to-market ratios, firms with higher income growth should have higher returns and expectations are realized (on average). Alternatively, changes in financial health may predict future returns because market participants are slow to react to signals contained in financial statements, i.e., expectations are slowly revised over time. I investigate net trading of institutional investors to test whether investors expectations are realized or revised. Consistent with the latter interpretation, improving financial health predicts both future returns and future demand by institutional investors.
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Details
- Title
- Institutional investors and financial statement analysis
- Creators
- Nicole Yunjeong Choi
- Contributors
- Richard W. Sias (Chair)John R. Nofsinger (Committee Member)Harry J Turtle (Committee Member)
- Awarding Institution
- Washington State University
- Academic Unit
- Carson College of Business
- Theses and Dissertations
- Doctor of Philosophy (PhD), Washington State University
- Publisher
- Washington State University
- Number of pages
- 127
- Identifiers
- 99901055141101842
- Language
- English
- Resource Type
- Dissertation