Institutional Trading Around Earnings Announcements

38 Pages Posted: 28 Mar 2007

See all articles by Adrian Looi

Adrian Looi

UNSW Australia Business School, School of Banking and Finance

Matt Pinnuck

University of Melbourne - Department of Accounting and Business Information Systems

David R. Gallagher

Rozetta Institute

Date Written: March 2007

Abstract

This study utilizes a unique database comprising the daily transactions of institutional Australian equity managers to examine whether active investment managers realize abnormal returns from earnings announcements, the nature of the trading strategies employed to generate these abnormal returns, and the magnitude of abnormal returns. We examine three strategies. First, whether fund managers realize abnormal returns from earnings announcements portfolio positions that most likely reflect fundamental analysis. Second, whether fund managers realize abnormal returns from trades immediately prior to the announcement, which most likely reflect short term-profiteering due to information leakage. Third, we examine whether fund managers realize abnormal returns from trades during the announcement period that most likely reflect superior interpretation of the actual earnings announcement. We find that fund managers realize abnormal returns from all three strategies. In addition, we also examine whether fund managers are rational in constructing their trading strategies, and find no evidence of the disposition effect. When investment managers have executed incorrect bets prior to earnings announcements, they subsequently reverse their trades once the public information is released.

Keywords: institutional trading, equity managers, earnings announcements, informed trading, short-term profiting, interpreting

JEL Classification: G23

Suggested Citation

Looi, Adrian and Pinnuck, Matthew and Gallagher, David R., Institutional Trading Around Earnings Announcements (March 2007). Available at SSRN: https://ssrn.com/abstract=972653 or http://dx.doi.org/10.2139/ssrn.972653

Adrian Looi (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Matthew Pinnuck

University of Melbourne - Department of Accounting and Business Information Systems ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia

David R. Gallagher

Rozetta Institute ( email )

Sydney

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