Small Negative Earnings Surprises and Transient Institutions’ Trading Behavior

67 Pages Posted: 1 Sep 2009 Last revised: 24 Aug 2010

See all articles by Gang Hu

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance

Bin Ke

National University of Singapore

Yong Yu

University of Texas at Austin

Date Written: August 17, 2010

Abstract

We use a proprietary database of institutional investors’ daily stock transactions to test the validity of a common managerial perception that transient institutions sell their stock ownership indiscriminately upon announcements of small negative earnings surprises, resulting in unwarranted drops in stock prices. Consistent with the managerial perception, we find economically significant selling by transient institutions in response to small negative earnings surprises that is even larger than transient institutions’ selling in response to large negative earnings surprises. Transient institutions’ selling in response to small negative earnings surprises is also accompanied with significant contemporaneous stock price declines. However, transient institutions’ trading in response to small negative earnings surprises is positively associated with the abnormal returns subsequent to the earnings announcements, suggesting that their trading response is informative. Overall, our results refute the managerial perception.

Keywords: institutional investors, small negative earnings surprises

JEL Classification: G20, M41, M43

Suggested Citation

Hu, Gang and Ke, Bin and Yu, Yong, Small Negative Earnings Surprises and Transient Institutions’ Trading Behavior (August 17, 2010). Available at SSRN: https://ssrn.com/abstract=1465661 or http://dx.doi.org/10.2139/ssrn.1465661

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M1038, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong
(852) 3400 8455 (Phone)

HOME PAGE: http://ganghu.org

Bin Ke

National University of Singapore ( email )

Mochtar Riady Building, BIZ 1, #07-54
15 Kent Ridge Drive
Singapore, 119245
Singapore
+6566013133 (Phone)

Yong Yu (Contact Author)

University of Texas at Austin ( email )

1 University Station B6400
Austin, TX 78712
United States
(512)471-6714 (Phone)
(512)471-3904 (Fax)

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