Robustness Test

V.2.1 Cluster the Standard Errors at Firm Level

In financial panel data sets, the residuals may be correlated across firms or across time and the estimated standard errors of regression can be biased even after the adjustment following White (1980). To deal with this problem, Peterson (2009) provides a different method to estimate the standard errors by clustering the standard errors at firm level. The examinations will be done following this approach in this section.

Table 10 presents the cross-section regressions of Eq. (6) with firm-level cluster standard errors (Petersen, 2009). Although the significance of Competition× ADJPIN is not so strong (the interaction term is significant at 5% if the Herfindahl index of shares held by institutional investors is used as competition proxy, and at10% if the number of institutional investors is used as competition proxy), the results still show that high information competition reduces the effect of information asymmetry on bond yield spreads.

[Insert Table 10 here]

V.2.2 Transient Type Institutional Investors

Bushee (1998) classifies institution investors into different types according to their trading strategies and defines the type of investors holding portfolio with high turnover and high diversified as transient investors. Wang and Zhang (2009) use this algorithm to analyze how institutional investors play roles in determining bond yield spreads. Akins et al. (2012) also use transient institutional investors as one of their proxies of informed traders.

This study identifies transient type institutional investors according to the algorithm developed by Bushee (1998) and exams the empirical tests using the number of transient institutional investors and the Herfindahl index of shares held by transient institutional investors. As before, the number of transient institutional investors (#InstTR) and the Herfindahl index of transient institutional investors (HerfInstTR) are ranked and divided into two groups according to their 75th percentiles each year. The dummy variable NumTR or HerfTR will be defined as 1 if the firm-year observation belongs to the high competition group, and be defined as 0 otherwise. Table 3 provides the summary statistics of these variables.

Table 11 presents the empirical examination of hypothesis 1 using these new competition proxies. Model (1) and (2) are cross-sectional regressions of yield spreads against ADJPIN and competition proxies, controlling only economic cycle. The results show that both the number of transient institutional investors (NumTR) and the Herfindahl index (HerfTR) can significantly reduce the premiums due to information asymmetry. Same as the empirical results provided before, the competition proxies also negatively relate to bond yield spreads directly and the scales of their reduction in yield spread will become smaller as GDP become higher. Model (3) and (4) incorporate other firm and bond characteristic control variables. The effect of NumTR is even more

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significant, but the coefficient of HerfTR× ADJPIN is insignificant after these control variables are added into the regression model. Generally speaking, the reduction effect of information competition on information premiums still exists if considering only the transient type institutional investors.

[Insert Table 11 here]

As the main examinations, bonds are divided into four groups according to their time to maturity. This study then investigates the effect of information competition among transient institutional investors on bond yield spreads within each group. Table 8 presents the standard deviations of competition proxies considering only the transient institutional investors on different-maturity bonds. The differences of standard deviations are not very large among these groups. Table 12 provides the results of regressions. The empirical results still show that the effect of information competition on information premium is most prominent for bonds with short maturity date if the Herfindahl index of transient institutional investors (HerfTR) is used as the competition proxy, although the term structure become unclear if the number of transient institutional investors (NumTR) is used as the competition proxy.

[Insert Table 12 here]

V.2.3 Corporate Governance Effects

This study uses institutional investors as proxies of informed traders, and analyzes the effects of information competition on information premium of bond. On the other hand, literatures also interpret the effects of institutional ownership on bond yield

spread from the aspect of corporate governance. This section provides the empirical examinations of the information hypothesis after controlling governance effects.

From the aspect of monitoring effects, corporate governance mechanisms can mitigate management-equity agency costs, leading to the maximization of firm value.

Thus, firms with better corporate governance tend to have lower bond yield spreads E-index are from RiskMetrics (IRRC) database, and the data of institutional ownership is from Thomson Reuters Institutional (13f) Holdings-s34 database and COMPUSTAT

2 The twenty-four provisions of G-index include staggered board, limitation on amending bylaws, limitation on amending the charter, supermajority to approve a merger, golden parachute, poison pill, limitation on special meeting, limitation on written consent, elimination of cumulative voting, secret ballot, director indemnification, director indemnification contract, limited director liability, compensation plan, severance agreement, unequal voting rights, blank check preferred stock, fair price requirements, cash-out law, director duties, business combination law, antigreenmail provision, pension parachute, and silver parachute.

3 The six provisions of E-index include staggered board, limitation on amending bylaws, limitation on amending the charter, supermajority to approve a merger, golden parachute and poison pill.

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database.

[Insert Table 13 here]

Table 13 provides the empirical examinations after controlling institutional ownership. The regression coefficients of the interaction terms Competition× ADJPIN are still significance in most models, confirming that the reduction of information premium due to the information competition among informed investors still exist after controlling institutional ownership, which is the proxy of governance effects.

[Insert Table 14 here]

Table 14 presents the empirical results with G-index (Gompers et al., 2003) or E-index (Bebchuk, 2009) is used as the proxy of corporate governance effects, and Table 15 presents the results of the cross-sectional regressions with both institutional ownership and G-index (or E-index) are added. Except for the model which Herfindahl index of shares held by transient institutional investors (HerfTR) is used as the competition proxy, all regression coefficients of the interaction terms

Competition× ADJPIN are significantly negative.

[Insert Table 15 here]

Generally, the effect that information competition among informed investors reduces information premium is robust even after considering the governance effects.