Can Transient Institutions Correctly Interpret Small Negative Earnings Surprises in the Absence of Access to Management's Private Information?

61 Pages Posted: 26 Apr 2018

See all articles by Gang Hu

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance

Bin Ke

National University of Singapore

Yong Yu

University of Texas at Austin

Date Written: January 8, 2018

Abstract

Using a proprietary database of institutional investors’ daily stock trading records in the post-Regulation FD period, this study examines whether transient institutions have the independent ability to correctly process small negative earnings surprise announcements, which management claims transient institutions have difficulty in interpreting. We find economically significant abnormal selling by transient institutions in response to small negative earnings surprises. Transient institutions’ selling in response to small negative earnings surprises is also associated with significant contemporaneous stock price declines. However, we find no evidence that transient institutions’ trading in response to small negative earnings surprises is an overreaction as there is no reversal of stock prices subsequent to transient institutions’ trading. More importantly, we show that transient institutions’ trading in response to small negative earnings surprises helps improve the informational efficiency of share prices.

Keywords: institutional investors, small negative earnings surprises, market efficiency

JEL Classification: G20, M41, M43

Suggested Citation

Hu, Gang and Ke, Bin and Yu, Yong, Can Transient Institutions Correctly Interpret Small Negative Earnings Surprises in the Absence of Access to Management's Private Information? (January 8, 2018). Journal of Accounting, Auditing and Finance, Vol. 33, No. 1, 2018. Available at SSRN: https://ssrn.com/abstract=3158097

Gang Hu (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M1038, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong
(852) 3400 8455 (Phone)

HOME PAGE: http://ganghu.org

Bin Ke

National University of Singapore ( email )

Mochtar Riady Building, BIZ 1, #07-54
15 Kent Ridge Drive
Singapore, 119245
Singapore
+6566013133 (Phone)

Yong Yu

University of Texas at Austin ( email )

1 University Station B6400
Austin, TX 78712
United States
(512)471-6714 (Phone)
(512)471-3904 (Fax)

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