Date of Degree


Document Type


Degree Name





Jun Wang

Committee Members

Hammou Elbarmi

Armen Hovakimian

Dexin Zhou

Subject Categories

Finance and Financial Management


index reconstruction, institutional investor, firm governance


This dissertation consists of three chapters that span earnings management, innovation, and insider trading.

Chapter 1: Prior literature finds that earnings management is negatively correlated with institutional ownership. The question is whether institutional investors drive down earnings management of the firms they invest in, or they choose firms with lower earnings management. In this paper, I use the regression discontinuity design around Russell 1000 and 2000 indexes reconstruction to obtain an exogenous variation in institutional ownership. I find that institutional investors do not drive down earnings management after they become shareholders. Instead, institutions choose firms with lower earnings management level when they make investment decisions. To further support the preference hypothesis, I add measures of institution preference in the panel regression and find that the negative relation between institutional ownership and earnings management disappears.

Chapter 2 (joint with Yang Liu and Jun Wang): We study the effects of passive institutional investors on corporate innovation. The existing literature has shown a negative relation between the two, and in some cases, no relation. When we apply the regression discontinuity design around the Russell 1000/2000 indices reconstruction to come up with an exogenous variation of passive institutional investors, we find that more passive institutional investors bring more corporate innovations. In addition to the evidence that passive institutional investors bring better corporate governance practices, we show two more channels. Passive institutional investors reduce the overall CEO turnover probability and they are more discriminating in linking CEO turnover to relative performance. Passive institutional investors are associated with wide adoption of employee stock options and employee stock options foster innovation.

Chapter 3: This essay studies the effect of institutional investors on insider trading. By applying the regression discontinuity design around the Russell 1000/2000 indices reconstruction to come up with an exogenous variation of institutional ownership, I find that institutional investors reduce insider trading: both the frequency of insider transactions and the total volumes traded. This effect is stronger for firms with higher information asymmetry and lower price impact concerns, showing that institutional investors play as the monitoring role in firm governance.

This work is embargoed and will be available for download on Saturday, May 30, 2020

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