The role of institutional investors in corporate events

Submission note: A thesis submitted in total fulfilment of the requirements for the degree of Doctor of Philosophy to the La Trobe Business School, College of Arts, Social Sciences and Commerce, La Trobe University, Bundoora.

This thesis consists of three independent essays on institutional investors, payout events, and litigation events in the U.S. The common theme throughout the thesis is the role of institutional investors around litigation and corporate payout events. This thesis makes three main contributions to the literature. First, the thesis provides new evidence indicating that institutional investors are informed about, and trade ahead of, securities class action lawsuit events. Second, the thesis documents new evidence suggesting that institutional investors are informed traders prior to dividend reduction announcements. Third, the final contribution of this thesis emphasizes on the mitigation effect of institutional ownership on the information content of open market repurchases, controlling for dividend payment status. The first essay, using a sample of securities class action lawsuits from 1997 to 2011, examines the trading behaviour of institutional investors prior to securities class action lawsuit announcements. This essay finds that institutional investors are net sellers in litigation firms during the one-quarter, one-month, and one-week periods prior to the announcements. They also trade more intensely in firms that experience a shorter litigation process or belong to industries with a lower expected incidence of litigation. Finally, this study finds that trading by all types of institutions, including both pension plan sponsors and money managers, is associated with the announcement-period cumulative abnormal returns, and predicts the firm’s likelihood of being sued by their shareholders. Overall, this essay highlights the important role of institutional trading around securities class action lawsuit events. The second essay explores the trading behaviour of institutional investors before dividend reduction announcements. Using a large proprietary database of transaction-level institutional trades for the period of 1997–2011, this essays finds that institutional investors are net sellers in dividend-reduction firms during the two quarters prior to the announcements. They also trade more intensely in firms that have greater information asymmetry. However, this study only finds weak evidence that institutions trade more intensely in the firms that do not communicate with the market prior to dividend-reduction events. Finally, all institutional investors appear to earn positive profits by trading in the two quarters prior to the announcements, and money managers outperform pension plan sponsors. Overall, this essay highlights the important role of institutional trading around dividend reduction events. The last essay examines the impact of institutional ownership on the information content of open market share repurchase (OMR) announcements, while taking into account the firm’s dividend payment status. Using a sample of U.S. firms that made open market repurchase announcements during the 1991–2012 period, this study finds that the market reacts more positively to the OMR announcements by non-dividend paying firms than to those by dividend paying firms. In addition, this study identifies positive long-term returns following OMR announcements by non-dividend paying firms. Finally, this study documents that dividend status mitigates the effect of information asymmetry on the information content of OMR programs. Overall, this essay provides important insights into the association of institutional ownership with the information content of open market repurchases, conditioning on firm dividend payment status.