Independent Institutional Investors and Equity Returns
54 Pages Posted: 16 Feb 2009
Date Written: December 12, 2009
We find that the well-documented positive relation between institutional ownership and future equity returns comes almost entirely from independent institutional trading (i.e., change in equity ownership by independent institutions). Not only does independent institutional trading predict future stock returns with no long-run price reversal, it is also positively related to future earnings surprises (relative to analyst expectations) and earnings announcement abnormal returns. In contrast, grey institutions (which have existing or potential business relationships with firms in which they invest) have no such predictive power. Furthermore, the predictive power of independent institutional trading on future stock returns exists only among firms with high information asymmetry, but not among firms with low information asymmetry. Overall, our findings suggest that independent institutions have information advantages over grey institutions in the equity market.
Keywords: institutional ownership, independent institutions, information asymmetry, earnings surprise, earnings announcement abnormal returns, operating performance
JEL Classification: G20, G21, G22, G23
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