Corrective Trading: An Analysis of Institutional Investors’ Information Advantages

49 Pages Posted: 23 May 2019

See all articles by Yawen Jiao

Yawen Jiao

University of California, Riverside

Date Written: April 9, 2019


Investors with future-return-related information use it to correct past decisions that no longer fit. Using this rationale, we decompose institutional trading into corrective (correcting past portfolio decisions) and implied (implied by past portfolio weights) trades. Corrective trades positively predict future stock returns and earnings surprises, whereas implied trades negatively predict returns. The return-predictability of corrective trades is strong across all stock, institution, portfolio turnover, and flow types. It declines over time but persists among institutions with moderate investment horizons. An institutional investor’s tendency to trade correctively and the performance of corrective trades for the top 20% of institutions are highly persistent. The results illustrate the distribution and evolvement of institutional investors’ informational advantages.

Keywords: institutional investors, informational advantages, trading strategies

JEL Classification: G12; G14; G23

Suggested Citation

Jiao, Yawen, Corrective Trading: An Analysis of Institutional Investors’ Information Advantages (April 9, 2019). Available at SSRN: or

Yawen Jiao (Contact Author)

University of California, Riverside ( email )

Riverside, CA 92521
United States

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