Title

The Impact of Institutional Ownership and Board Structure on Earnings Management and Acquisition Performance of S&P 500 Index Firms around Their Addition to the Index and an Experimental Approach to Buyer's Brokerage

Date of Completion

January 2011

Keywords

Economics, Finance

Degree

Ph.D.

Abstract

The first paper studies the relationship between institutional ownership, board structure and earnings management, and in particular investigates whether board structure and activist institutional ownership as it is characterized in the literature have an impact on earnings management. For this, we focus on accruals management around addition to the S&P 500 index. We find that activist institutional owners as defined by investment behavior induce a decrease in accruals management. When active institutions are defined based on institutional type, we find the opposite result; accruals management decreases with passive institutional ownership. We conclude that it is how an institution invests that determines whether it is likely to monitor firms effectively. Its type, such as a bank or a mutual fund, is not relevant. We have strong evidence that antitakeover provisions are negatively correlated with accruals management. Accruals management decreases with CEO ownership and increases with CEO duality and director ownership before a firm is added to the index. Once the firm is added, these effects disappear. Hence, addition to the index makes a difference. The firm management and the board may be changing their practices due to enhanced visibility of the firm or more intensive coverage by analysts and/or media. ^ In the second paper we study the acquisition performance of S&P 500 firms and its connection to institutional shareholder activism and board structure. Total institutional ownership or activist institutional ownership, defined either by investment behavior or by type, does not have a consistent effect on the number of value-increasing and value-destroying acquisitions. Addition to the index changes the nature of the relationship between M&A activity and institutional ownership and board characteristics. Total, activist and passive institutional ownership are not correlated with the market reaction to acquisition announcements. Abnormal returns to acquisition announcements tend to increase with CEO ownership and CEO duality and to decrease with director ownership. However, the effects of CEO ownership and director ownership are reversed once the firm is included in the index. So, addition to the index does make a difference. One possible explanation is that once the firm becomes an index constituent, it becomes visible enough so that the monitoring effect of the governance variables diminishes. Total institutional ownership, passive institutional ownership defined by investment behavior and activist institutional ownership defined by type reduce acquisition premium in stock deals. Activist institutional ownership, whether defined by investment behavior or by type, increases the likelihood of completion of an announced deal and antitakeover provisions decrease it. Addition to the index does not have an impact on the acquisition success rate. ^ The third paper looks into two alternative commission structures in the context of intermediated bargaining. A seller's broker represents the seller and a buyer's broker represents the buyer. In one alternative, once the sale is realized, both brokers receive 3% of the sales price as their compensation from the seller. In the other alternative, the total compensation for the two brokers is a fixed amount. The seller's broker receives 3% of the sales price from the seller as compensation and the buyer's broker receives the difference between the fixed total compensation amount and the 3% of the sales price from the buyer. The latter alternative is associated with a decrease in price and an increase in the time on the market compared to the former. We see no change in the likelihood of agreement. The buyer's broker in the latter commission structure may be leading the buyer to be a tougher bargainer in order to maximize his/her profit. This would explain the fact that time on the market is longer and likelihood of agreement does not increase. If time on the market is more important than the price, this may explain why the former alternative is more prevalent in the real estate brokerage industry. ^