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When Companies Use Their Wiggle Room, Which Investors Care?


Ceccarelli, Marco (2018). When Companies Use Their Wiggle Room, Which Investors Care? Swiss Finance Institute Research Paper 18-62, University of Zurich.

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 misconduct that breaches their trust, investors significantly reduce the exploited WR of their holdings. Overall, investors seem to have heterogeneous preferences for WR exploitation and a liking for cautious firms that cannot be explained by a prot maximization motive alone.

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 misconduct that breaches their trust, investors significantly reduce the exploited WR of their holdings. Overall, investors seem to have heterogeneous preferences for WR exploitation and a liking for cautious firms that cannot be explained by a prot maximization motive alone.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:30 August 2018
Deposited On:12 Sep 2018 14:00
Last Modified:07 Apr 2020 07:10
Series Name:Swiss Finance Institute Research Paper
Number of Pages:67
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3247044#
Other Identification Number:merlin-id:16757

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