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Institutional Investors and the Informational Efficiency of Prices

Eric K. Kelley

University of Arizona

Ekkehart Boehmer

EDHEC Business School

July 24, 2007

AFA 2007 Chicago Meetings Paper
Sixteenth Annual Utah Winter Finance Conference

The percentage of U.S. equity held by institutional investors has quadrupled in the past four decades, and a prominent share of trading activity is due to institutions. Yet we know little about how institutions affect the informational efficiency of share prices, one important dimension of market quality. We study a broad cross-section of NYSE-listed stocks between 1983 and 2004 using measures of the relative informational efficiency of prices constructed from transaction data. We find that stocks with greater institutional ownership are priced more efficiently in the sense that their transaction prices more closely follow a random walk. This result cannot be attributed to liquidity effects and is not likely the result of reverse causality. We also show that institutional trading activity is one mechanism by which prices become more efficient, even when institutions trade passively or follow momentum strategies.

Number of Pages in PDF File: 51

Keywords: market efficiency, institutional investors, institutional trading, market quality

JEL Classification: G14, G12

working papers series

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Date posted: August 31, 2005  

Suggested Citation

Kelley, Eric K. and Boehmer, Ekkehart, Institutional Investors and the Informational Efficiency of Prices (July 24, 2007). AFA 2007 Chicago Meetings Paper; Sixteenth Annual Utah Winter Finance Conference. Available at SSRN: http://ssrn.com/abstract=791905 or http://dx.doi.org/10.2139/ssrn.791905

Contact Information

Eric K. Kelley
University of Arizona ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-5589 (Phone)
Ekkehart Boehmer (Contact Author)
EDHEC Business School ( email )
One George Street, #07-02
Singapore, 049145
HOME PAGE: http://www.ekki.org
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