Accounting Quality and Information Content of Non-Institutional Blockholder Sales

Non-institutional blockholders (shareholders with ownership ≥ 5%), such as, individuals, non-financial firms, and government-affiliated blockholders, are more prevalent than institutional investors in many markets. These blockholders differ significantly from institutional investors in the way that they acquire and process information, making it an open question whether they are able to understand accounting quality (AQ) and whether AQ affects their decisions. Employing a reform setting in China that led to a large number of sizable sales by non-institutional blockholders in the period of 2006-2013, I demonstrate that the information content of the sales is higher when the sales involve low-AQ firms. Specifically, both the negative market reactions and the post-sale underperformance in earnings are stronger for the firms with lower AQ, after accounting for potential endogeneity. Moreover, conditional on future negative performance shocks, blockholders in low-AQ firms are significantly more likely to sell. Together, these findings are consistent with the idea that low AQ, by increasing blockholders’ information advantage, makes blockholders’ knowledge regarding firm performance more valuable. More importantly, the evidence suggests that non-institutional blockholders, though arguably less sophisticated than institutional investors, recognize the importance of AQ and incorporate AQ in their trading decisions.