Institutional Investors and the Informational Efficiency of Prices

Posted: 14 Aug 2008 Last revised: 16 Aug 2008

See all articles by Ekkehart Boehmer

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business

Eric K. Kelley

University of Tennessee, Knoxville

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Date Written: August 13, 2008

Abstract

Using a broad panel of NYSE-listed stocks between 1983 and 2004, we study the relation between institutional shareholdings and the relative informational efficiency of prices, measured as deviations from a random walk. Stocks with greater institutional ownership are priced more efficiently and we show that variation in liquidity does not drive this result. One mechanism through which prices become more efficient is institutional trading activity, even when institutions trade passively. But efficiency is also directly related to institutional holdings, even after controlling for institutional trading, analyst coverage, short selling, variation in liquidity, and firm characteristics.

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

JEL Classification: G14, G12

Suggested Citation

Boehmer, Ekkehart and Kelley, Eric K., Institutional Investors and the Informational Efficiency of Prices (August 13, 2008). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1223903

Ekkehart Boehmer (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

Singapore

Eric K. Kelley

University of Tennessee, Knoxville ( email )

916 Volunteer Blvd
Knoxville, TN 37996
United States

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