Date of Award

Summer 7-1-2022

Degree Type


Degree Name

Doctor of Philosophy (PhD)




Liang, Lihong

Subject Categories

Accounting | Business


This dissertation consists of four chapters. Chapter one is the introduction. Chapter two examines the impact of passive institutional ownership on firm disclosure. Passive institutional investors favor more information to minimize monitoring and trading costs. However, passive institutions' diverse holdings make it costly to collect individual firms' private information, so they demand more public information. Managers are likely to supply more firm material information because passive institutions can exert influence by using their sizeable ownership stake. More firm disclosure is related to a better firm information environment and higher stock liquidity. To test the hypothesis, I choose the S&P 500 addition setting to take advantage of the large variations of passive institutional ownership around the addition events. Consistent with the predictions, I find that higher passive institutional ownership is associated with a higher frequency of voluntary 8-K filings. I also find that firms with higher passive ownership have higher analyst following, lower forecast dispersion, bid-ask spreads, and probability of an informed trade, consistent with a better overall firm information environment for firms with higher passive ownership. Chapter three tests the impact of passive institutional ownership on market reactions to earnings announcements. The improved information environment, which is associated with increased passive ownership, can reduce transaction costs and mitigate delayed reactions. Besides, as firm disclosure can resolve uncertainty in future earnings, investors can confirm or revise their beliefs in future earnings in a timely manner and quickly react to earnings announcements. In addition, an increase in passive ownership is related to an increase in lending supply and a decrease in short-sale constraints. Higher passive ownership should lead to stronger initial market reactions and lower drifts. Consistent with the prediction, I show that higher passive institutional ownership is associated with a higher earnings response coefficient around the earnings announcement window and a lower post-earnings announcement drift. The results are robust to using a matched sample, random-walk-based SUE, alternative estimation windows, and an alternative measure of passive institutional ownership. Chapter four investigates whether the documented stronger market reactions are due to the timely incorporation of firm-specific earnings component or systematic earnings component. On the one hand, more firm-specific earnings information could be incorporated into stock prices due to a better firm information environment. On the other hand, the stronger reactions could stem from the timely assimilation of systematic earnings information. Since passive funds trade stocks in the portfolio together, investment decisions of buying or selling index fund shares are mainly based on the market-wide earnings news. Decomposing earnings surprises into a firm-specific and systematic earnings component, I show that the enhanced market reactions are due to the timely incorporation of both firm-specific and systematic earnings news into the stock price.


Open Access

Included in

Accounting Commons