Do Institutional Investors Amplify or Dampen Noise Shocks to Stocks?
46 Pages Posted: 19 Nov 2015
Date Written: November 12, 2015
We examine whether institutional investors amplify or dampen mispricing induced by noise trading. Stock recommendations in the Wall Street Journal’s Investment Dartboard Column (IDC) stimulate noise trading that generates mispricing. The mispricing decreases with institutional ownership, which is consistent with the model of Kyle, Ou-Yang, and Wei (2010) and indicates that institutions dampen noise trading-induced mispricing. Institutions dampen mispricing by selling stealthily when wealth-constrained noise traders buy on IDC recommendations. Furthermore, stealth selling increases with information asymmetry. Our findings are robust to controls for liquidity and clustering, and alternative measures for institutional ownership and mispricing.
Keywords: Institutional investors, noise trading, mispricing, idiosyncratic volatility
JEL Classification: G23, G14, G12
Suggested Citation: Suggested Citation