How big institutional shareholders make companies more investor-friendly – Nemit Shroff

MIT Sloan Assistant Professor Nemit Shroff

MIT Sloan Assistant Professor Nemit Shroff

From MarketWatch 

Over the past three decades, there has been tremendous change in ownership of publicly traded firms in the U.S. Consolidation in the asset management industry and the rise in mutual fund investing have led to a small number of institutional investors becoming the largest shareholders of most listed firms. Today, just shy of 70% of U.S. public firms are commonly owned. According to Compustat, Black Rock and Vanguard Group are among the largest five shareholders of more than 53% of the firms in its database.

Given this significant shift toward common ownership, it’s important to understand the consequences on a company’s behavior. Does common ownership impact competition? Does it benefit investors?

Prior literature suggests that common ownership decreases competitive behavior. The theory is that managers of co-owned firms behave in ways to increase the portfolio value of the common owners. It also maintains that disclosure by one firm in an industry is good for everyone, as there are spillover effects related to liquidity and cost of capital for other firms in that industry.

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Credible financial statements help firms raise financing and increase investment — Nemit Shroff

MIT Sloan Assistant Professor Nemit Shroff

MIT Sloan Assistant Professor Nemit Shroff

From Columbia Law School Blue Sky Blog

One of the primary purposes of financial statements is to facilitate the exchange of capital between investors and companies. The extent to which investors rely on the information reported in financial statements depends on the credibility of those financial statements – that is, the trust or faith investors have in the financial statements presented to them. Typically, companies establish the credibility of their financial statements by having an independent auditor verify the accuracy of those disclosures. However, the effect of auditing on financial statement credibility depends on the independence of the auditor and the rigor with which the audit is performed. An increase in reporting credibility can increase the degree to which investors rely on financial statement information for both writing debt (and other) contracts that govern the terms under which capital is exchanged and informing investors about companies’ operations and performance. As a result, an increase in reporting credibility can increase the company’s access to external finance, which can increase its ability to invest in new projects.

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Twitter’s missing tweet: Timely IPO data — Nemit Shroff

MIT Sloan Assistant Professor Nemit Shroff

MIT Sloan Assistant Professor Nemit Shroff

From WSJ MarketWatch

It’s widely believed that uncertainty is bad for business. If you don’t have the right information, you make the wrong decisions. Or you make no decisions at all. We saw this play out during the financial crisis when there was quite a lot of uncertainty and many investors held back.

With that in mind, my colleagues and I recently looked at the effect of having greater financial information available within an industry. Specifically, we studied the impact of public firms on an industry, as public firms are required to disclose large amounts of information. They have to issue quarterly financial statements and provide information on operational details such as business strategy, expected future outlook, and business risk. Financial analysts and the business press provide even more information on those companies. Taken together, that disclosure activity can improve the information environment for firms in that industry by reducing uncertainty.

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