Institutional investors and equity returns: Are short-term institutions better informed?

• Main Authors: YAN, Xuemin (Sterling), ZHANG, Zhe
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2009
• Subjects: Institutional trading; Investment horizon; Return predictability; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/1082; https://ink.library.smu.edu.sg/context/lkcsb_research/article/2081/viewcontent/Institutional_investors_and_equity_returns_pp.pdf
• Institution: Singapore Management University

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 forecast 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.