Trading in the Presence of Short-Lived Private Information: Evidence from Analyst Recommendation Changes

67 Pages Posted: 23 Apr 2014 Last revised: 25 May 2017

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Roni Michaely

Cornell University - Cornell Tech NYC

Pamela C. Moulton

Cornell University - SC Johnson College of Business

Date Written: May 24, 2017

Abstract

We use a proprietary dataset to test the implications of several asymmetric information models on how short-lived private information affects trading strategies and liquidity provision. Our identification rests on information acquisition before analyst recommendations are publically announced. We provide the first empirical evidence supporting theoretical predictions that early-informed traders “sell the news” after “buying the rumor.” Further, we find distinct profit-taking patterns across different classes of institutions. Uninformed institutions, but not individuals, emerge as de-facto liquidity providers to better-informed institutions. Placebo tests confirm that these trading patterns are unique to situations in which some investors have a short-lived informational advantage.

Keywords: private information, analyst recommendations, institutional trading, individual trading

JEL Classification: G14, G18, G23, G24

Suggested Citation

Kadan, Ohad and Michaely, Roni and Moulton, Pamela C., Trading in the Presence of Short-Lived Private Information: Evidence from Analyst Recommendation Changes (May 24, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2427282 or http://dx.doi.org/10.2139/ssrn.2427282

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Roni Michaely

Cornell University - Cornell Tech NYC ( email )

2 West Loop Rd
New York, NY 10044
United States

Pamela C. Moulton (Contact Author)

Cornell University - SC Johnson College of Business ( email )

Ithaca, NY 14853
United States

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