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

Authors: Yan, Xuemin (Sterling); Zhang, Zhe

Source: Review of Financial Studies, Volume 22, Number 2, 20 February 2009 , pp. 893-924(32)

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Abstract:

We show that the positive relation between institutional ownership and future stock returns documented in Gompers and Metrick (<xref ref-type="bibr" rid="B19">2001</xref>) 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.

Keywords: G12; G14; G20

Document Type: Research article

DOI: http://dx.doi.org/10.1093/revfin/hhl046

Publication date: 2009-02-20

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The Review of Financial Studies is a major forum for the promotion and wide dissemination of significant new research in financial economics. As reflected by its broadly based editorial board, the Review balances theoretical and empirical contributions. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Finance is interpreted broadly to include the interface between finance and economics. The Review is sponsored by The Society for Financial Studies. The editors of the Review and officers of the Society are elected for limited terms.