The Effect of Media Coverage and Institutional Ownership on Performance

This thesis consists of three essays that investigate the effects of media coverage and institutional ownership on flows and performances of mutual funds and firms. The first essay (chapter 2) investigates the importance of the existence and tone of media coverage on open-ended mutual funds (OEMFs). Media coverage can be an important channel for determining which mutual funds are being considered for purchase or retention by less sophisticated individual investors. We find that media coverage is more likely for bigger, older and fee-waiving open ended mutual funds. Consistent with the investor attention hypothesis, we find that the existence, frequency and tone of media articles, and also excluding those that do not mention holdings, significantly affect future OEMF flows and performance more strongly during the following-day. Over longer periods of time, we find that the fund-performance effect of learning based on the tone of news articles is more pronounced. We find significant but small spill-over effects from news mentions of other same-management funds. We also find that funds with negative coverage are not punished as much as funds with positive coverage are rewarded. The second essay (chapter 3) discusses the significance of changes in holdings of institutional investors on the stocks they hold. These changes may have market impacts, particularly if their size provides informational advantages due to better firm manager access, especially for stocks with lower analyst reviews and weaker internal corporate governance. We find that a stock’s performance is related to prior changes in the stock holdings of institutional investors with more than 1% of a firm’s outstanding shares after the publication of the Dow Jones end-of-quarter top institutional investor reports (“events”), and that the relation is more pronounced for smaller stocks. We find that the stock holdings of these Top Institutional Investors are a better predictor of a stock’s subsequent returns compared to the total stock holdings of other institutional investors. We observe abnormal performances associated with the reported shifts in stock holdings after event dates, and an increase in trading volumes on the event dates, which is consistent with the investor recognition hypothesis. The third and final essay (chapter 4) investigates whether corporate social responsibility (CSR) affects firm value which has gained extra interest since the COVID-19 market crash. In this essay, we investigate whether a firm’s Environmental/Social/Governance (ESG) orientations affect the changes in the composition of the holdings of institutional investors. We find that CSR firms outperform others throughout the market downfall, especially when they have more long-horizon institutional ownership (IO). Our results indicate that the environmental and social scores of firms significantly increase cross-sectional stock returns. We observe that CSR has a stronger effect on firm value and performance during the COVID-19 market crash for firms with higher monitoring from influential institutional owners. We also find that institutional investors do not trade based on ESG scores during normal times but that their trading reflects and affects these metrics during times of financial turmoil