Who's Informed? An Analysis of Stock Ownership and Informed Trading

33 Pages Posted: 30 Apr 2001

See all articles by Patrick J. Dennis

Patrick J. Dennis

University of Virginia - McIntire School of Commerce

James Weston

Rice University - Jesse H. Jones Graduate School of Business

Date Written: June 4, 2001

Abstract

This paper examines the relationship between ownership structure and informed trading. We attempt to reconcile some puzzling results in recent empirical literature about the impact of ownership on informed trading using a comprehensive set of proxies for informed trading and a recent sample of firms from three U.S equity exchanges. As proxies for informed trading, we use four measures: (1) The relative spread, (2) the adverse selection component of the spread, constructed as in Huang and Stoll (1997), (3) the price impact of a trade, following Foster and Viswanathan (1993) and Hasbrouck (1991), and (4) the probability of informed trading constructed as in Easley, Kiefer, O'Hara and Paperman (1996). We find strong evidence of a cross-sectional relationship between our measures of informed trading and ownership by institutions and insiders. Our results are robust to a variety of estimation techniques, control variables, and proxies for informed trading. Overall, our results suggest that individual investors are less informed relative to institutions and insiders. These findings are consistent with economies of scale in information acquisition and aggregation, and with recent research that indicates that market makers move prices in response to trades by institutions.

Keywords: Microstructure, institutional ownership, informed trading

JEL Classification: G14

Suggested Citation

Dennis, Patrick J. and Weston, James Peter, Who's Informed? An Analysis of Stock Ownership and Informed Trading (June 4, 2001). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=267350 or http://dx.doi.org/10.2139/ssrn.267350

Patrick J. Dennis (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
804-924-4050 (Phone)

James Peter Weston

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005
United States
713-348-4480 (Phone)
713-348-6331 (Fax)

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