Short-Term Institutions’ Information Advantage and Overvaluation

The North American Journal of Economics and Finance, 101299

29 Pages Posted: 25 Jan 2021

See all articles by Brian Du

Brian Du

California State University, East Bay

Alejandro Serrano

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American)

Andre C. Vianna

Ministry of the Economy of Brazil - Santa Catarina

Date Written: October 2020

Abstract

Prior literature has documented that institutions which trade more frequently are better able to forecast future returns and have an informational advantage. This study examines a proximate explanation for the differences in performance based on institutions’ investment horizon – short-term institutions are better informed because they are better able to identify overvalued stocks that are short-sale constrained and overvalued in the context of Miller’s (1977) overvaluation hypothesis. Analysis is conducted on 6,330 unique firms from 1996 to 2014 using the calendar-time portfolio approach where abnormal returns are estimated from the Fama-French-Carhart four-factor regression model. The results provide evidence that stocks which are extremely overvalued due to short-sale constraints have the greatest decline in short-term institutional ownership, consistent with the notion that short-term institutions are able to correctly assess the components for stock overvaluation.

Keywords: Short Interest; Institutional Ownership; Short-Sale Constraints

JEL Classification: G12; G14; G20

Suggested Citation

Du, Brian and Serrano, Alejandro and Vianna, Andre C., Short-Term Institutions’ Information Advantage and Overvaluation (October 2020). The North American Journal of Economics and Finance, 101299, Available at SSRN: https://ssrn.com/abstract=3731018 or http://dx.doi.org/10.2139/ssrn.3731018

Brian Du

California State University, East Bay ( email )

25800 Carlos Bee Blvd.
Hayward, CA 94542
United States

Alejandro Serrano

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) ( email )

1201 W. University Dr.
Edinburg, TX 78539
United States

Andre C. Vianna (Contact Author)

Ministry of the Economy of Brazil - Santa Catarina ( email )

Rua Nunes Machado 192, Centro
Florianópolis, Santa Catarina 88010-460
Brazil

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