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Independent Institutional Investors and Equity Returns

58 Pages Posted: 17 Mar 2008 Last revised: 25 Jul 2011

Yawen Jiao

University of California, Riverside

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 7, 2008

Abstract

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.

Keywords: institutional ownership; independent institutions; information production; monitoring; earnings surprise; operating performance

JEL Classification: G20, G21, G22, G23

Suggested Citation

Jiao, Yawen and Liu, Mark H., Independent Institutional Investors and Equity Returns (March 7, 2008). Available at SSRN: https://ssrn.com/abstract=1099490 or http://dx.doi.org/10.2139/ssrn.1099490

Yawen Jiao

University of California, Riverside ( email )

Riverside, CA 92521
United States

Mark H. Liu (Contact Author)

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

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