Do Transient Institutions Overreact to Small Negative Earnings Surprises?

59 Pages Posted: 27 Oct 2009

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: October 26, 2009

Abstract

We use a proprietary database of institutional investors’ daily stock transactions to examine transient institutions’ trading behavior in response to announcements of small negative earnings surprises (defined as quarterly earnings that fall short of analysts’ consensus forecasts by one cent). Transient institutions’ average selling in response to small negative earnings surprises is significant and is greater than transient institutions’ average selling in response to large negative earnings surprises less than - 1 cent. Transient institutions’ selling in response to small negative earnings surprises is positively associated with the contemporaneous abnormal stock returns. However, transient institutions’ selling in response to small negative earnings surprises is positively associated with the abnormal returns in the three months subsequent to the earnings announcement window, suggesting that transient institutions’ trading response is informative. Our results do not support the common managerial allegation that transient institutions overreact to announcements of small negative earnings surprises.

Keywords: institutional investors, small negative earnings surprises

JEL Classification: G20, M41, M43

Suggested Citation

Hu, Gang and Ke, Bin and Yu, Yong, Do Transient Institutions Overreact to Small Negative Earnings Surprises? (October 26, 2009). Available at SSRN: https://ssrn.com/abstract=1495384 or http://dx.doi.org/10.2139/ssrn.1495384

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 (Contact Author)

National University of Singapore ( email )

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

Yong Yu

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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