A Better Measure of Institutional Informed Trading

57 Pages Posted: 14 Dec 2012 Last revised: 18 Jul 2014

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Buhui Qiu

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: June 2014


Although many studies show that the presence of institutional investors facilitates the incorporation of accounting information into financial markets, the evidence of informed trading by institutions is rather limited in the extant literature. We address these inconsistent findings by proposing PC_NII, percentage changes in the number of a stock’s institutional investors, as a novel informed trading measure. PC_NII is better able to detect informed trading than are changes in institutional ownership (∆IO) — the measure commonly used in previous studies — because (1) entries and exits are usually triggered by substantive private information and (2) only a small fraction of institutions have superior information. As conjectured, PC_NII subsumes the information content of ∆IO and other institutional trading and herding measures in the forecast of stock returns, and its strong predictive power for stock returns reflects mainly its close correlation with future earnings surprises. We also show that PC_NII helps address empirical issues that require a reliable measure of institutional informed trading.

Keywords: PC_NII, Informed Trading, Earnings Surprises, Stock Returns

JEL Classification: M40, M41, G14, G18

Suggested Citation

Guo, Hui and Qiu, Buhui, A Better Measure of Institutional Informed Trading (June 2014). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2080462 or http://dx.doi.org/10.2139/ssrn.2080462

Hui Guo

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Buhui Qiu (Contact Author)

University of Sydney Business School ( email )

Room 513, The Codrington Building
The University of Sydney
Sydney, NSW 2006
+61 2 9036 6435 (Phone)
+61 2 9351 6461 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/buhuiq

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

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