How Does the Investment Horizon of Institutional Investors of a Firm Affect the Information Asymmetry of its Stock?
Posted: 13 Mar 2012 Last revised: 5 Jul 2016
Date Written: March 1, 2012
Our empirical evidence establishes a positive association between short-term institutional ownership and private information in stock trading but a negative correlation between long-term institutional ownership and private information. These relations suggest that short-term institutional investors tend to explore their information advantage and trade speculatively for short-term profits, while long-term institutional investors are more likely to monitor the firms they own, leading to the reduction of the information asymmetry about the firm’s fundamental values. Our results are robust to the inclusion of controls for firm characteristics, analyst coverage and insider trading, as well as the choice of different private information proxies and estimation methods. Overall, our findings highlight the important role of investment horizon of institutional investors in shaping a firm’s information environment.
Keywords: Institutional Investors, Investment Horizon, Private Information, Information Asymmetry, Firm-specific Information
JEL Classification: G14, G32, G34
Suggested Citation: Suggested Citation