Institutional Investors and the Informational Efficiency of Prices

45 Pages Posted: 20 Mar 2005

See all articles by Eric K. Kelley

Eric K. Kelley

University of Tennessee, Knoxville

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business

Multiple version iconThere are 4 versions of this paper

Date Written: August 25, 2005

Abstract

The percentage of U.S. equity held by institutional investors has quadrupled in the past four decades, and a prominent share of trading activity is due to institutions. Yet we know little about how institutions affect the informational efficiency of share prices, one important dimension of market quality. We study a broad cross-section of NYSE-listed stocks between 1983 and 2003, using measures of the relative informational efficiency of prices constructed from transaction data. We find that stocks with greater institutional ownership are priced more efficiently in the sense that their transaction prices more closely follow a random walk. Moreover, efficiency improves following exogenous shocks in institutional ownership. Finally, we demonstrate that increases in actual institutional trading volume are associated with greater efficiency, an effect that appears to be distinct from the effect associated with cross-sectional differences in institutional holdings.

Keywords: Market efficiency, institutional investors, asset pricing

JEL Classification: G14, G23, G12

Suggested Citation

Kelley, Eric K. and Boehmer, Ekkehart, Institutional Investors and the Informational Efficiency of Prices (August 25, 2005). Available at SSRN: https://ssrn.com/abstract=687110 or http://dx.doi.org/10.2139/ssrn.687110

Eric K. Kelley

University of Tennessee, Knoxville ( email )

916 Volunteer Blvd
Knoxville, TN 37996
United States

Ekkehart Boehmer (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

Singapore

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