Abstract
Investors with future-return-related information use it to strategically adjust past decisions that no longer fit. Using this rationale, we decompose institutional trading into decision-based trades (adjusting past portfolio decisions) and implied trades (implied by past portfolio decisions). Decision-based trades positively predict future stock returns and earnings surprises whereas implied trades negatively predict returns. An institutional investor’s tendency to engage in decision-based trading and the performance of decision-based trades for the top 20% of institutions are highly persistent. The results illustrate institutional investors’ informational advantages in stock markets. • Institutional trading can be decomposed into decision-based trades and implied trades. • Decision-based trades positively predict future stock returns and earnings surprises. • Implied trades negatively predict future stock returns. • The performance of decision-based trades for the top 20% of institutions is persistent.
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