Abstract

https://ssrn.com/abstract=2690405
 


 



Do Institutional Investors Amplify or Dampen Noise Shocks to Stocks?


Jayant R. Kale


Northeastern University

Yee Cheng Loon


Securities and Exchange Commission (SEC)

November 12, 2015

Northeastern U. D’Amore-McKim School of Business Research Paper No. 2690405

Abstract:     
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.

Number of Pages in PDF File: 46

Keywords: Institutional investors, noise trading, mispricing, idiosyncratic volatility

JEL Classification: G23, G14, G12


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Date posted: November 19, 2015  

Suggested Citation

Kale, Jayant R. and Loon, Yee Cheng, Do Institutional Investors Amplify or Dampen Noise Shocks to Stocks? (November 12, 2015). Northeastern U. D’Amore-McKim School of Business Research Paper No. 2690405. Available at SSRN: https://ssrn.com/abstract=2690405 or http://dx.doi.org/10.2139/ssrn.2690405

Contact Information

Jayant Raghunath Kale (Contact Author)
Northeastern University ( email )
Boston, MA 02115
United States

Yee Cheng Loon
Securities and Exchange Commission (SEC) ( email )
100 F Street NE
Washington, DC 20549
United States
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