Do Institutional Investors Amplify or Dampen Noise Shocks to Stocks?
Jayant R. Kale
Yee Cheng Loon
Securities and Exchange Commission (SEC)
November 12, 2015
Northeastern U. D’Amore-McKim School of Business Research Paper No. 2690405
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
Date posted: November 19, 2015