Abstract
ABSTRACTUsing the relationship between institutional trades and sequential public information, this study provides a systematic way to identify institutional trades that are informative about future equity returns. By studying the US financial institutions from 1994 to 2016, I show that institutional trades initiated by managers responding proactively to upcoming informational signals strongly predict future stock returns. The predictability of informed institutions is more evident for stocks with higher information asymmetry and in periods of higher profit opportunities. The informed institutions outperform the uninformed ones by 2% on an annualized basis and their performance gap is persistent. Importantly, the return predictability of informed institutional trades is not subsumed by the return‐predictive signals documented in prior research, computed either from institutional holdings or from financial statements. Further analyses show that the informed institutional investors derive their superior ability to forecast future stock returns from processing corporate fundamentals and acquiring private information. This study derives a novel return predictor using the institutions' proactive trading behavior and identifies various informational sources of informed traders.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
