Walk the Line: Do Investors Reward Firms that Exploit Regulatory Grey Areas?

Marco Ceccarelli
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Marco Ceccarelli: University of Zurich - Department of Banking and Finance; Swiss Finance Institute

No 18-62, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper investigates whether certain investors either prefer or dislike holding firms that exploit more of the available regulatory wiggle room and if such a strategy pays off. Exploited wiggle room (WR) is captured by relatively aggressive tax planning, financial reporting, and earnings management practices. I find that long-term, low-turnover investors hold firms with 3% higher exploited WR than those held by short-term, high-turnover investors. After experiencing financial adviser misconduct that breaches their trust, investors reduce the exploited WR of their holdings by 5%. This is consistent with investors choosing firms according to their preferences for WR. Overall, investors seem to have heterogeneous preferences for WR exploitation and a liking for cautious firms that cannot be explained by a profit maximization motive alone.

Keywords: Behavioral investments; Corporate governance; Institutional investors (search for similar items in EconPapers)
Pages: 69 pages
Date: 2018-09, Revised 2019-02
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1862

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