Do Institutional Investors Amplify or Dampen Noise Shocks to Stocks?

46 Pages Posted: 19 Nov 2015  

Jayant R. Kale

Northeastern University

Yee Cheng Loon

Securities and Exchange Commission (SEC)

Date Written: November 12, 2015

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.

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

JEL Classification: G23, G14, G12

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

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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