Earnings Announcements: Good News for Institutional Investors and Short Sellers

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