Earnings Announcements: Good News for Institutional Investors and Short Sellers

62 Pages Posted: 11 Jan 2010

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Michael D. McKenzie

The University of Sydney - Discipline of Finance; University of Cambridge - Cambridge Endowment for Research in Finance (CERF); Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: January 11, 2010

Abstract

Both institutional owners and short sellers decrease their positions prior to earnings announcements, and increase their positions in the post-announcement period. Pre-announcement changes in institutional holdings and short interest have significant explanatory power with respect to abnormal earnings announcement returns, where most of the power comes from institutions and short sellers closing positions in order to avoid losses. Analysis of post-announcement returns indicates that aggressive trading by short sellers in reaction to earnings releases enhances immediate price discovery, which reduces their ability to profit from post-earnings announcement drift. The more muted reaction of institutional traders to earnings releases has no significant impact on earnings response coefficients, and allows institutions to successfully target stocks that underreact to earnings news.

Keywords: Informed Traders, Institutional Ownership, Short Selling, Earnings Announcements, Post Earnings Announcement Drift, PEAD

JEL Classification: G14

Suggested Citation

Berkman, Henk and McKenzie, Michael David, Earnings Announcements: Good News for Institutional Investors and Short Sellers (January 11, 2010). Finance and Corporate Governance Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1534445 or http://dx.doi.org/10.2139/ssrn.1534445

Henk Berkman

University of Auckland - Business School ( email )

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Michael David McKenzie (Contact Author)

The University of Sydney - Discipline of Finance ( email )

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Australia
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University of Cambridge - Cambridge Endowment for Research in Finance (CERF) ( email )

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Cambridge, CB2 1AG
United Kingdom

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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