Investor Sophistication and Patterns in Stock Returns after Earnings Announcements

Posted: 21 Jan 2000

See all articles by Eli Bartov

Eli Bartov

NYU Stern School of Business

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Itzhak Krinsky

Deutsche Bank Alex. Brown

Abstract

This study tests whether the observed patterns in stock returns after quarterly earnings announcements are related to the proportion of firm shares held by institutional investors, a variable used by prior research to proxy for investor sophistication. Our findings show that the institutional holdings variable is negatively correlated with the observed post-announcement abnormal returns. Our findings also show that traditional proxies for transaction costs (i.e., trading volume, stock price) as well as firm size have little incremental power to explain post announcement abnormal returns when institutional holdings is an explanatory variable. If institutional ownership is a valid proxy for investor sophistication, these findings suggest that the trading activity of unsophisticated investors underlies the predictability of stock returns after earnings announcements. However, tests evaluating the validity of institutional holdings as a proxy for investor sophistication yield only mixed results. This calls for caution in interpreting our findings.

JEL Classification: M41, G14, G23, G32

Suggested Citation

Bartov, Eli and Radhakrishnan, Suresh and Krinsky, Itzhak, Investor Sophistication and Patterns in Stock Returns after Earnings Announcements. The Accounting Review, January 2000, Available at SSRN: https://ssrn.com/abstract=202268

Eli Bartov (Contact Author)

NYU Stern School of Business ( email )

44 W. 4th Street, Suite 10-96
New York, NY 10012
United States
212.998.0016 (Phone)

Suresh Radhakrishnan

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

Itzhak Krinsky

Deutsche Bank Alex. Brown

New York, NY
United States

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