Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?

Zhang, Zhe; Yan, Xuemin Sterling

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Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?

Review of Financial Studies, Forthcoming

48 Pages Posted: 23 Oct 2006

See all articles by Zhe Zhang

Zhe Zhang

Singapore Management University - Lee Kong Chian School of Business

Xuemin Sterling Yan

Lehigh University - College of Business

There are 2 versions of this paper

Abstract

We show that the positive relation between institutional ownership and future stock returns documented in Gompers and Metrick (2001) is driven by short-term institutions. Furthermore, short-term institutions' trading forecasts future stock returns. This predictability does not reverse in the long run and is stronger for small and growth stocks. Short-term institutions' trading is also positively related to future earnings surprises. By contrast, long-term institutions' trading does not forecasts future returns, nor is it related to future earnings news. Our results are consistent with the view that short-term institutions are better informed and they trade actively to exploit their informational advantage.

Keywords: Institutional trading, Investment horizon, Return predictability

JEL Classification: G12, G14, G20

Suggested Citation: Suggested Citation

Zhang, Zhe and Yan, Xuemin Sterling, Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?. Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=906052