How Informed are Actively Trading Institutional Investors? Evidence from Their Trading Behavior Before a Break in a String of Consecutive Earnings Increases

We examine whether transient institutional investors (i.e., institutions that trade actively to maximize short-term profits) have information that allows them to predict a break in a string of consecutive quarterly earnings increases and thereby avoid the economically significant negative stock price response associated with the break announcement. We show that transient institutions predict the break at least one quarter in advance of the break quarter. We also provide evidence that is consistent with transient institutions obtaining information regarding the impending break from private communications with management. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2004.

[1]  William M. Cready,et al.  Institutional ownership, differential predisclosure precision and trading volume at announcement dates , 1997 .

[2]  B. Ke,et al.  Do Institutional Investors Exploit the Post-Earnings Announcement Drift? , 2004 .

[3]  Qiang Cheng,et al.  Institutional Holdings and Analysts' Stock Recommendations , 2005 .

[4]  Ravi Bhushan,et al.  An informational efficiency perspective on the post-earnings announcement drift , 1994 .

[5]  Sheridan Titman,et al.  On Persistence in Mutual Fund Performance , 1997 .

[6]  Eric G. Falkenstein,et al.  Preferences for Stock Characteristics As Revealed by Mutual Fund Portfolio Holdings , 1996 .

[7]  S. Balsam,et al.  Accruals Management, Investor Sophistication, and Equity Valuation: Evidence from 10-Q Filings , 2000 .

[8]  Gregory S. Miller,et al.  Managerial and Investor Responses to Disclosure Regulation: The Case of Reg Fd and Conference Calls , 2004 .

[9]  Dawn Matsumoto,et al.  Do Conference Calls Affect Analysts' Forecasts? , 2001 .

[10]  Douglas J. Skinner.  WHY FIRMS VOLUNTARILY DISCLOSE BAD-NEWS , 1994 .

[11]  Robert E. Verrecchia,et al.  Trading Volume And Price Reactions To Public Announcements , 1991 .

[12]  W. Rogers.  Regression standard errors in clustered samples , 1994 .

[13]  Richard G. Sloan.  Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings , 1998 .

[14]  Marilyn F. Johnson,et al.  An Empirical Examination of Conference Calls as a Voluntary Disclosure Medium , 1997 .

[15]  Beverly R. Walther,et al.  Investor Sophistication and Market Earnings Expectations , 1997 .

[16]  R. Cook.  Detection of influential observation in linear regression , 2000 .

[17]  D. Collins,et al.  Investor Sophistication and the Mispricing of Accruals , 2003 .

[18]  Brian J. Bushee,et al.  Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility , 2000 .

[19]  Shivaram Rajgopal,et al.  Institutional Ownership and the Extent to which Stock Prices Reflect Future Earnings , 2002 .

[20]  Suresh Radhakrishnan,et al.  Investor Sophistication and Patterns in Stock Returns after Earnings Announcements , 2000 .

[21]  Dawn A. Matsumoto,et al.  Management's Incentives to Avoid Negative Earnings Surprises , 2002 .

[22]  Mary E. Barth,et al.  Market rewards associated with patterns of increasing earnings , 1999 .

[23]  E. Miller,et al.  Investment Intelligence from Insider Trading , 1999 .

[24]  B. Lev,et al.  Changes in Institutional Ownership and Subsequent Earnings Announcement Abnormal Returns , 2002 .

[25]  Bin Ke,et al.  What Insiders Know About Future Earnings and How They Use it: Evidence from Insider Trades , 2002 .

[26]  Victor L. Bernard,et al.  POST-EARNINGS-ANNOUNCEMENT DRIFT - DELAYED PRICE RESPONSE OR RISK PREMIUM , 1989 .

[27]  Paul A. Gompers,et al.  Institutional Investors and Equity Prices , 1998 .

[28]  Brian J. Bushee.  Do Institutional Investors Prefer Near-Term Earnings Over Long-Run Value? , 1999 .

[29]  Harry DeAngelo,et al.  Reversal of fortune dividend signaling and the disappearance of sustained earnings growth , 1996 .