Institutional Trading and Anomalies

Abstract

We study whether institutional investors trade on stock market anomalies. We condition our analysis on whether information about the anomalies is readily available to investors through academic publication and the release of necessary accounting data. Using 14 well-documented anomalies, we observe an increase in anomaly-based trading among institutional investors, especially hedge funds and transient institutions, following the publication of research on anomalies. We directly relate this increase in trading to the observed decay in post-publication anomaly returns. In contrast to recent evidence, our findings support the role of institutional investors in the arbitrage process and in improving market efficiency.