Local Institutional Investors, Information Asymmetries, and Equity Returns

57 Pages Posted: 10 Sep 2007 Last revised: 5 Feb 2014

See all articles by Bok Baik

Bok Baik

Seoul National University

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School

Jin-Mo Kim

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: August 1, 2009

Abstract

Using geographically proximate institutions as a close approximation to informed investors, this paper examines the informational role of institutional investors in stock markets. We find that both the level of and change in local institutional ownership predict future stock returns; in contrast, such predictive abilities are relatively weak for nonlocal institutional ownership. Moreover, the positive relation between local institutional holdings and stock performance is pronounced in firms with high information asymmetry. The positive relation is also more evident for holdings by institutions that are more likely to possess and exploit local information, such as local investment advisors, high local ownership institutions, and high local turnover institutions. Finally, we find that the stocks that local institutional investors hold (trade) earn higher excess returns around future earnings announcements than those that nonlocal institutional investors hold (trade). These findings suggest that geography proxies for the availability of information and allows local institutional investors to execute profitable trades based on their superior information.

Keywords: local institutional investors, equity returns, information asymmetry

JEL Classification: M41, G12

Suggested Citation

Baik, Bok and Kang, Jun-Koo and Kim, Jin-Mo, Local Institutional Investors, Information Asymmetries, and Equity Returns (August 1, 2009). Available at SSRN: https://ssrn.com/abstract=1012763 or http://dx.doi.org/10.2139/ssrn.1012763

Bok Baik (Contact Author)

Seoul National University ( email )

Seoul
Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Jin-Mo Kim

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States

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