Independent Institutional Investors and Equity Returns
University of California, Riverside
Mark H. Liu
University of Kentucky - Gatton College of Business and Economics
March 7, 2008
This paper finds that the well-documented positive relation between institutional ownership and future equity returns (e.g., Gompers and Metrick, 2001) comes almost entirely from independent institutions. Independent institutional trading predicts future stock returns with no long-run price reversal, and is positively related to future earnings surprises (relative to analyst expectations) and earnings announcement abnormal returns. In contrast, grey institutions (institutional investors that have existing or potential business relationships with firms in which they invest) have no such predictive power. Independent institutions' predictive power comes from their advantage in information production instead of their willingness to monitor: (1) the predictive power of independent institutional trading exists only among firms with high information production costs, but not among firms with low information production costs; (2) independent institutional trading is not associated with subsequent industry-adjusted operating performance.
Number of Pages in PDF File: 58
Keywords: institutional ownership; independent institutions; information production; monitoring; earnings surprise; operating performance
JEL Classification: G20, G21, G22, G23
Date posted: March 17, 2008 ; Last revised: July 25, 2011
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