Abstract
We find that both institutional owners and short sellers decrease their positions prior to earnings announcements, and increase their positions in the post-announcement period. Pre-announcement changes in institutional holdings and short interest have significant explanatory power with respect to the upcoming earnings announcement, where most of the explanatory power comes from institutional owners and short sellers closing positions in order to avoid losses. Analysis of post-announcement returns indicates that institutional owners, but not short sellers, successfully target stocks that underreact to earnings news, and that post-earnings announcement drift is significantly lower for stocks with higher institutional holdings. High pre-announcement short interest does not predict lower PEAD, but does predict negative post-earnings announcement returns.
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