Description:
This paper investigates whether certain investors either prefer or dislike holding firms that exploit more of the available regulatory wiggle room and if such a strategy pays off. Exploited wiggle room (WR) is captured by relatively aggressive tax planning, financial reporting, and earnings management practices. I find that long-term, low-turnover investors hold firms with 3% higher exploited WR than those held by short-term, high-turnover investors. After experiencing financial adviser misconduct that breaches their trust, investors reduce the exploited WR of their holdings by 5%. This is consistent with investors choosing firms according to their preferences for WR. Overall, investors seem to have heterogeneous preferences for WR exploitation and a liking for cautious firms that cannot be explained by a profit maximization motive alone