The Price Impacts of Informed Investors

Abstract

We empirically identify a group of stock-exchange accounts that profit from 11 yearsof earnings surprises. Their trading behavior is consistent with privately informedtrading, yet they have negative and temporary price impacts. We then empiricallyidentify a second group of accounts that have positive and permanent price impacts.The trading behavior of the second group is more consistent with trading on publicinformation, and they trade the wrong way before earnings surprises. The behaviorof both account groups contrasts with models that associate permanent price impactwith privately informed trading.

Keywords: Informed trading, financial statements, price impact