Accounting Fraud and Institutional Investors.

Abstract

This dissertation examines institutional investors' trading behavior in a sample of 322 firms alleged in Accounting, Auditing, and Enforcement Releases to have manipulated their accounting earnings (hereafter fraud firms). Over the course of the fraud period, I find that institutions increase their ownership in fraud firms by approximately 14 percent, resulting in institutional losses of approximately $138 billion. Although institutional investors' losses are significant, I find that in the quarter immediately prior to the public revelation of accounting frauds, institutions with short investment horizons ("transient" institutions) slightly mitigate their losses by decreasing their ownership in fraud firms. I also provide evidence that institutions that own fraud firm shares prior to a fraud and have large stakes in fraud firms, have large portfolios, or own a relatively large block of fraud firm shares divest shares prior to the public revelation of a fraud.