Institutional Consensus After Earnings Announcements: Information or Crowding?

54 Pages Posted: 15 Apr 2020

See all articles by Olga Klein

Olga Klein

University of Warwick - Warwick Business School

Daniel Klein

Klein Q-Fin Ltd.

Date Written: March 25, 2020

Abstract

This paper examines information processing skills of institutional investors after earnings releases. If institutions can correctly process earnings signals, their trades should push the price towards the fundamental value. In contrast, if institutions mechanically trade in the news direction, their trading pressure should lead to price overreaction, consistent with predictions of Stein (2009). Overall, our findings reconcile the two opposing views by conditioning the effects of institutional trading on the precision of the earnings signal. We find that institutions are good at processing signals with greater precision, whereas their trades after weaker signals can have destabilizing effects on stock prices.

Keywords: Institutional Consensus, Information Processing, Price Efficiency, Crowded Trading, Earnings Announcement

JEL Classification: G10, G14, G20

Suggested Citation

Klein, Olga and Klein, Daniel, Institutional Consensus After Earnings Announcements: Information or Crowding? (March 25, 2020). Available at SSRN: https://ssrn.com/abstract=3561637 or http://dx.doi.org/10.2139/ssrn.3561637

Olga Klein (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Daniel Klein

Klein Q-Fin Ltd. ( email )

Reading
Great Britain

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