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Institutional Investors and Equity Returns: Are Short-term Institutions Better Informed?

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  • Xuemin (Sterling) Yan
  • Zhe Zhang
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    Abstract

    We show that the positive relation between institutional ownership and future stock returns documented in Gompers and Metrick (2001) is driven by short-term institutions. Furthermore, short-term institutions' trading forecasts future stock returns. This predictability does not reverse in the long run and is stronger for small and growth stocks. Short-term institutions' trading is also positively related to future earnings surprises. By contrast, long-term institutions' trading does not forecast future returns, nor is it related to future earnings news. Our results are consistent with the view that short-term institutions are better informed and they trade actively to exploit their informational advantage. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 22 (2009)
    Issue (Month): 2 (February)
    Pages: 893-924

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    Handle: RePEc:oup:rfinst:v:22:y:2009:i:2:p:893-924

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    Cited by:
    1. Alex Edmans, 2013. "Blockholders and Corporate Governance," NBER Working Papers 19573, National Bureau of Economic Research, Inc.
    2. Chen, Haojun & Maher, Daniela, 2013. "On the predictive role of large futures trades for S&P500 index returns: An analysis of COT data as an informative trading signal," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 27(C), pages 177-201.
    3. Maffett, Mark, 2012. "Financial reporting opacity and informed trading by international institutional investors," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 54(2), pages 201-220.
    4. Naik, Pramod Kumar & Padhi, Puja, 2014. "An Empirical Evidence of Dynamic Interaction between institutional fund flows and Stock Market Returns," MPRA Paper 57723, University Library of Munich, Germany.
    5. Callen, Jeffrey L. & Fang, Xiaohua, 2013. "Institutional investor stability and crash risk: Monitoring versus short-termism?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3047-3063.
    6. Cao, Charles & Liang, Bing & Lo, Andrew W. & Petrasek, Lubomir, 2014. "Hedge fund holdings and stock market efficiency," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2014-36, Board of Governors of the Federal Reserve System (U.S.).
    7. Baik, Bok & Kang, Jun-Koo & Kim, Jin-Mo, 2010. "Local institutional investors, information asymmetries, and equity returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 97(1), pages 81-106, July.
    8. Frank Gyamfi-Yeboah & Alan Ziobrowski & Philip Seagraves, 2014. "Institutional Ownership and the Dynamics of Trading Volume around FFO Announcements," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 49(1), pages 73-90, July.
    9. Ramalingegowda, Santhosh & Yu, Yong, 2012. "Institutional ownership and conservatism," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 53(1), pages 98-114.
    10. Xiang, Erwei & Tian, Gloria Y. & Yang, Fan & Liu, Zhiyuan, 2014. "Do mutual funds have information advantage? Evidence from seasoned equity offerings in China," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 70-79.
    11. Kondor, Péter, 2011. "The more we know on the fundamental, the less we agree on the price," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8455, C.E.P.R. Discussion Papers.
    12. Martijn Cremers & Ankur Pareek, 2009. "Institutional Investors’ Investment Durations and Stock Return Anomalies: Momentum, Reversal, Accruals, Share Issuance and R&D Increases," Yale School of Management Working Papers, Yale School of Management amz2662, Yale School of Management, revised 04 Sep 2009.
    13. Richard Chung & Scott Fung & Szu-Yin Hung, 2012. "Institutional Investors and Firm Efficiency of Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 45(1), pages 171-211, June.
    14. Cristina Cella & Andrew Ellul & Mariassunta Giannetti, . "Investors’ Horizons and the Amplification of Market Shocks," FMG Discussion Papers, Financial Markets Group dp717, Financial Markets Group.
    15. Douglas Foster, F. & Gallagher, David R. & Looi, Adrian, 2011. "Institutional trading and share returns," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3383-3399.
    16. Attig, Najah & Cleary, Sean & El Ghoul, Sadok & Guedhami, Omrane, 2012. "Institutional investment horizon and investment–cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1164-1180.
    17. Danny Yeung, 2012. "The Impact of Institutional Ownership: A Study of the Australian Equity Market," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 11, June.
    18. Goldman, Eitan & Strobl, Günter, 2013. "Large shareholder trading and the complexity of corporate investments," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 22(1), pages 106-122.
    19. Ismail Adelopo & Kumba Jallow & Peter Scott, 2012. "Multiple large ownership structure, audit committee activity and audit fees: Evidence from the UK," Journal of Applied Accounting Research, Emerald Group Publishing, Emerald Group Publishing, vol. 13(2), pages 100-121.
    20. Li, Wei & Wang, Steven Shuye, 2010. "Daily institutional trades and stock price volatility in a retail investor dominated emerging market," Journal of Financial Markets, Elsevier, Elsevier, vol. 13(4), pages 448-474, November.
    21. An, Heng & Zhang, Ting, 2013. "Stock price synchronicity, crash risk, and institutional investors," Journal of Corporate Finance, Elsevier, Elsevier, vol. 21(C), pages 1-15.
    22. De Cesari, Amedeo & Espenlaub, Susanne & Khurshed, Arif & Simkovic, Michael, 2012. "The effects of ownership and stock liquidity on the timing of repurchase transactions," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(5), pages 1023-1050.

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