Institutional Consensus After Earnings Announcements: Information or Crowding?
61 Pages Posted: 15 Apr 2020 Last revised: 25 Mar 2021
Date Written: March 25, 2020
This paper examines information processing skills of institutional investors after earnings releases. If institutions correctly process earnings signals, their trades should push the price towards the new fundamental value. However, if they mechanically follow a positive-feedback strategy, Stein (2009) predicts that their crowding can lead to price overreaction. Splitting institutions by their investment horizon, we find that institutions with longer-term horizons are better at processing earnings signals, whereas transient institutions, by trading on the PEAD, can have destabilizing effects on stock prices.
Keywords: Institutional Consensus, Information Processing, Price Efficiency, Crowded Trading, Earnings Announcement
JEL Classification: G10, G14, G20
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