Shareholder Coordination, Information Diffusion and Stock Returns

Published date01 November 2017
Date01 November 2017
The Financial Review 52 (2017) 563–595
Shareholder Coordination, Information
Diffusion and Stock Returns
Christos Pantzalis
University of South Florida
Bin Wang
Marquette University
We show that the quality of information-sharing networks linking firms’ institutional
investors has stock return predictability implications. Wefind that firms with high shareholder
coordination experience less local comovement and less post-earnings announcement drift,
consistent with the notion that information-sharing networks facilitate information diffusion
and improve stock price efficiency. In support of the view that coordination acts as an infor-
mation diffusion channel, we document that the stock return performance of firms with high
shareholder coordination leads that of firms with low shareholder coordination.
Keywords: shareholder coordination, information diffusion, return predictability
JEL Classifications: G14, G20, G30
Corresponding author: School of Business Administration, Marquette University, 312 David A.
Straz, Jr. Hall, Milwaukee, WI 53201; Phone: (414) 288-7188; Fax: (414) 288-5756; E-mail:
We would like to thank Richard Warr (the Editor) and two anonymous referees for their thoughtful
comments and suggestions. We also appreciate the many useful comments we receivedfrom participants
at the 2014 Financial Management Association meeting.
C2017 The Eastern Finance Association 563
564 C. Pantzalis and B. Wang/The Financial Review 52 (2017) 563–595
1. Introduction
Firms with good corporate governance are less prone to information asymme-
tries and should be less difficult for outside investorsto analyze. Institutional investors
are instrumental in shaping corporate governance and are generally regarded as im-
portant promoters of sound corporate policies, transparency (Ajinkya, Bhojraj and
Sengupta, 2005), and stock price informativeness (Piotroski and Roulstone, 2004).
However,since institutional investors are not a homogeneous group, but rather a col-
lection of clusters of institutions with different investment orientations and horizons,
their ability to improve corporate governance and firms’ information environment
relies not just on their mere size and resources, but also on their capacity to share
information with other institutional shareholders.1The transmission of value-relevant
information across the set of a firm’s institutional investors can be greatly facilitated
by the strength of professional and social networks that may exist among institutions.
There is recent evidence (Huang, 2013a,b; Kim, Pantzalis and Wang, 2015) sug-
gesting that coordination among institutions improves corporate governance. What
remains an unexplored question, and the core emphasis of this paper, is whether
the strength of information-sharing networks facilitating coordination among insti-
tutional investors has return predictability implications. The notion that coordination
among institutional investors can help predict returns relies on the premise that in-
stitutional investors’ information-sharing network can be viewed as a flow channel.
This channel allows market value-relevant information to be transmitted to stock
prices of firms lacking shareholder coordination after it has been impounded in stock
prices of peer firms enjoying shareholder coordination.2
Theory suggests that informed investors may have an effect on the speed of
price adjustments to new information. For example, Holden and Subrahmanyam
(1992) and Foster and Viswanathan (1993) extend the classic model of Kyle (1985)
and show that stock prices reflect new information more rapidly as the number of
informed investors increases. Empirical evidence confirms that stocks of firms with
more informed investors adjust to common information faster than stocks of firms
with less informed traders (Brennan, Jegadeesh and Swaminathan, 1993; Badrinath,
Kale and Noe, 1995).
Information-sharing networks play an important role in enhancing market effi-
ciency. Forexample, Colla and Mele (2010) find that price informativeness increases
1The alignment in institutions’ monitoring practices is catching practitioners’ and researchers’ attention.
For example, McCahery, Sautner and Starks (2010) provide survey evidence that 59% of institutional
investors among respondents consider coordination with other institutional investorsto improve monitor-
ing their managers. Huang (2013a,b) finds that shareholder coordination has a positive and significant
impact on the market for corporate control and corporate governance. Kim, Pantzalis and Wang (2015)
find that firms with high shareholder coordination have better earnings quality and stronger stock price
2Throughout this paper, we use the terms “institutional shareholder coordination,” “shareholder coordi-
nation,” and “coordination” interchangeably.
C. Pantzalis and B. Wang/The Financial Review 52 (2017) 563–595 565
in the presence of information-sharing networks among individual traders. Pareek
(2012) finds that strength of information-sharing networks between mutual fund man-
agers affects the response time of stock prices to common information. Therefore, we
conjecture that firms with strong information-sharing networks will adjust to common
information faster than those with weak information-sharing networks. More specif-
ically, we posit that cross-sectional variation in the ability of information-sharing
networks to facilitate coordination among institutional investors reflects differences
in the degree of skill-based information acquisition and processing costs faced by
investors. Intuitively, investor specialization, more often than not, adversely affects
investors’ capability to acquire and process new information, which thereby plays
an important role in the information diffusion (Menzly and Ozbas, 2010). On the
arrival of an information shock, information-sharing networks could break down the
informational barriers among the institutional investors with different specializations
and cause a quick and adequate response to it.
We demonstrate that institutional shareholder coordination improves investors’
information environment. Specifically, we show that firms with high (low) share-
holder coordination experience weak (strong) local comovement and post-earnings
announcement drift. This is consistent with the notion that coordination reduces fric-
tion in public information processing and encourages the collection of and trading on
private information.3
Previous studies utilize the Shapley value of existing shareholders as a proxy
for shareholder coordination. Shapley value was first introduced as a solution to
solve the problem of how to fairly distribute gains and costs among players in a
cooperative game theory (Milnor and Shapley, 1978). Zingales (1994) and Nenova
(2003) use Shapley value to capture the control value of shareholders’ voting rights.
Using shareholder-voting-based Shapley value as a proxy for coordination frictions
among the existing shareholders, Chakraborty and Gantchev (2013) find that private
investmentsin public equity can improve the equity coordination, leading to favorable
debt renegotiation outcomes. In spite of the merits of the Shapley value and given
the research question we try to answer in this paper, we believe that an information-
sharing-network-based measure of shareholder coordination is more appropriate than
a voting-rights-based one. Therefore, to measure the degree of coordination among
institutional shareholders, we follow Huang (2013a,b) and devise two proxies that
rely on the premise that the likelihood and strength of social connections increases
with geographic proximity and similarity of values, attitudes, and beliefs compris-
ing an institutional shareholders’ corporate investment philosophy.4Social network
3Jin and Myers (2006) find that opaque stocks are associated with high stock price synchronicity. Zhang
(2006) argues that investors underreact more to public information when there is more information
4The first proxy is the inverse of the weighted average of the geographic distance among institutional
shareholders (hereafter COORD_PROX) and the second one is the weighted average correlation among
institutions’ portfolios of stock holdings (hereafter COORD_PORT).

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