Are Institutional Investors Truly Skilled or Merely Opportunistic?
43 Pages Posted: 10 Jul 2013 Last revised: 28 Apr 2016
Date Written: July 16, 2014
Abstract
Using a new geography-based measure of investment skill, we show that the superior intra-quarter trading performance of institutional investors reflects opportunistic access to short-term local information rather than innate trading skill. Institutions have high average local abnormal performance but this performance is not persistent over time. Further, local trading activity and profitability increase prior to earnings announcements. In contrast, although the average non-local intra-quarter performance is not significant, it is persistent in the cross-section: superior non-local performance predicts superior future performance in both non-local and local trades. Overall, performance in non-local trades is a better indicator of innate trading ability.
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