How Are Institutions Informed? Proactive Trading, Information Flows, and Stock Selection Strategies

Posted: 11 Dec 2020

Date Written: November 18, 2020


Using the relationship between institutional trades and sequential public information, this study provides a systematic way to identify institutional trades that are informative about future equity returns. By studying the U.S. financial institutions from 1994 to 2016, I show that institutional trades initiated by managers responding proactively to upcoming informational signals strongly predict future stock returns. The predictability of informed institutions is more evident for stocks with higher information asymmetry and in periods of higher profit opportunities. The informed institutions outperform the uninformed ones by 2% on an annualized basis and their performance gap is persistent. Importantly, the return predictability of informed institutional trades is not subsumed by the return-predictive signals documented in prior research, computed either from institutional holdings or from financial statements. Further analyses show that the informed institutional investors derive their superior ability of forecasting future stock returns from processing corporate fundamentals and acquiring private information. This study derives a novel return predictor using the institutions’ proactive trading behavior and identifies various informational sources of informed traders.

Keywords: Institutional investors, informed traders, return predictability, fundamental analysis, private information

JEL Classification: G20, G28, G14, G11

Suggested Citation

Wang, Yan, How Are Institutions Informed? Proactive Trading, Information Flows, and Stock Selection Strategies (November 18, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN:

Yan Wang (Contact Author)

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4

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