Adjustive Trading: An Analysis of Institutional Investors’ Information Advantages

54 Pages Posted: 23 May 2019 Last revised: 8 Jan 2020

See all articles by Yawen Jiao

Yawen Jiao

University of California, Riverside

Date Written: January 6, 2020

Abstract

Investors with future-return-related information use it to adjust past decisions that no longer fit. Using this rationale, we decompose institutional trading into adjustive (adjusting past portfolio decisions) and implied (implied by past portfolio weights) trades. Adjustive trades positively predict future stock returns and earnings surprises, whereas implied trades negatively predict returns. The return-predictability of adjustive 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 adjustively and the performance of adjustive 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, Adjustive Trading: An Analysis of Institutional Investors’ Information Advantages (January 6, 2020). Available at SSRN: https://ssrn.com/abstract=3389091 or http://dx.doi.org/10.2139/ssrn.3389091

Yawen Jiao (Contact Author)

University of California, Riverside ( email )

Riverside, CA 92521
United States

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