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E-MailAnne M. Anderson is Associate Professor of Finance and Paul Brockman is Professor of Finance at Lehigh University. This post is based on a recent paper by Professors Anderson and Brockman.
We examine the reliability of Form 13F filings and document the widespread presence of significant reporting errors. Even among a select group of high-profile bank holding companies, we find that filing firms frequently (1) report their holdings of securities that do not appear on the SEC’s Official List, (2) report inaccurate market prices for securities that do appear on the SEC’s Official List, and (3) file amended 13F reports that can be less accurate than the original filings. Overall, our evidence shows that the widespread reliance on 13F filings for institutional ownership figures is unwarranted.
Form 13F is the most fundamental and comprehensive source of institutional investor information. As described in Section 13(f) of the Securities Act Amendments of 1975 (pertaining to the Securities Exchange Act of 1934), institutional investors who exercise investment discretion on portfolios of over $100 million of Section 13(f) securities must disclose such holdings within 45 days of the end of each calendar quarter. The 13F disclosure requirements appear to be both straightforward to interpret and simple to implement; first, institutional investors match their holdings against the SEC’s Official List; second, institutional investors disclose the CUSIP number, number of shares, and the total market value of their holdings for matched securities as of the last business day of the quarter. These CUSIPs, shares, and market values provide the raw material for researchers, investors, and regulators to construct databases from which to analyze institutional investor behavior. Our study examines the accuracy of this raw material.
One indication that 13F filings might have serious flaws comes from investors who have attempted to track changes in institutional holdings. Disclosure accuracy is particularly important for such investors as they attempt to replicate successful trading strategies. There is anecdotal evidence from various investor blogs complaining that inaccuracies are sufficiently serious to render 13F filings useless for tracking (and therefore replicating) purposes. In his March 13, 2014 blog Dave Manuel asks “How does the SEC not have a program in place to adequately deal with Form 13F filings?” and then continues as follows:
As it stands right now, the Form 13F filings are just a non-standardized mishmash of jumbled (and often inaccurate) information. Seriously—have fun going through these filings if you are doing any type of serious research. I guarantee you that you will have a migraine headache when you are done. In addition, you will very likely notice glaring errors staring back at you from the pages of the reports.
In addition to investor complaints, a second (and perhaps more credible) indication that 13F filings could have serious flaws comes directly from within the SEC itself. In 2010, the SEC’s Office of Inspector General (OIG) issued a 46-page report entitled Review of the SEC’s Section 13(f) Reporting Requirements. The OIG investigation uncovered multiple problems that cast serious doubts on the reliability of 13F filings. In our study, we attempt to quantify the degree to which users can or cannot assume that such information is accurate and complete.
The main results of our study can be summarized as follows. First, we show that the overall frequency of incorrect pricing in 13F reports exceeds the overall frequency of correct pricing. We also find substantial variation across individual reporting firms. Second, we find that the magnitudes of these mispricings are economically significant. Since all reporting firms are required to record their security prices on last day of the quarter, these prices should be the same across all reporting firms for the same security. Third, we calculate percentage deviations for each 13F-reported security based on the minimum (maximum) price reported among our sample firms and find that the average percentage deviation is -50.41% (12.86%) for equities based on minimum (maximum) 13F-reported prices. Fourth, we investigate the accuracy of amended 13F filings and find that they do not appear to rectify the initial inaccuracies. Fifth, we show that if one assumes that prices per share are accurate in the 13F filings, then the number-of-share figures would substantially distort the ownership interest percentages. Finally, we compare institutional holdings of Dow 30 firms based on the 13F filings of institutions versus the DEF14A filings of individual firms (i.e., annual proxy statements) and find significant differences.
In summary, our study shows that reliance on 13F-reported figures is fraught with problems. Our empirical findings are consistent with investor complaints that these filings contain “glaring errors” and a “non-standardized mishmash of jumbled (and often inaccurate) information.”
The complete paper is available for download here.
