Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?
48 Pages Posted: 23 Oct 2006
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
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