Who Are Informed? The Evidence from Institutional Trades

64 Pages Posted: 27 Nov 2012 Last revised: 15 Jan 2018

Date Written: November 1, 2013


Using the relation between institutional trades and sequential public information, this paper provides a systematic way to identify institutional trades that are informative about future equity returns. By studying actively managed U.S. institutions from 1994 to 2010, I show that institutional trades initiated by managers responding proactively to upcoming informational signals strongly predict future stock returns. A hedging portfolio based on these trades generates an average risk-adjusted abnormal return of approximately 3% per quarter. The predictability is more pronounced for stocks with higher information asymmetry, such as those of firms with high volatility and young age. I also find that the most informed institutional traders are likely to have short-term investment horizon, large block holdings, high industry portfolio concentrations, as well as reside in financial centers. My results indicate that the informedness of certain institutional investor groups is substantially reduced after Regulation FD.

Keywords: Institutional investors, informed traders, return predictability, sequential public information

JEL Classification: G20, G28, G14, G11

Suggested Citation

Wang, Yan, Who Are Informed? The Evidence from Institutional Trades (November 1, 2013). Available at SSRN: https://ssrn.com/abstract=2180972 or http://dx.doi.org/10.2139/ssrn.2180972

Yan Wang (Contact Author)

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4

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