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RFS Advance Access originally published online on January 3, 2007
Review of Financial Studies 2009 22(2):893-924; doi:10.1093/revfin/hhl046
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© The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.

Institutional Investors and Equity Returns: Are Short-term Institutions Better Informed?

Xuemin (Sterling) Yan
University of Missouri - Columbia

Zhe Zhang
Singapore Management University

Address correspondence to Zhe Zhang, Singapore Management University, Lee Kong Chian School of Business, 50 Stamford Road, 178899, Singapore, or e-mail:joezhang{at}smu.edu.sg

JEL Classification: G12, G14, G20


  Abstract

We show that the positive relation between institutional ownership and future stock returns documented in Gompers and Metrick (2001) is driven by short-term institutions. Furthermore, short-term institutions' trading forecasts future stock returns. This predictability does not reverse in the long run and is stronger for small and growth stocks. Short-term institutions' trading is also positively related to future earnings surprises. By contrast, long-term institutions' trading does not forecast future returns, nor is it related to future earnings news. Our results are consistent with the view that short-term institutions are better informed and they trade actively to exploit their informational advantage.

We thank Paul Brockman, Kalok Chan, Charles Cao, Bhagwan Chowdhry, Dan French, Allaudeen Hameed, Grace Hao, John Howe, Inder Khurana, Tina Martin, Sandra Mortal, Shawn Ni, Andy Puckett, Avanidhar Subrahmanyam, Marti Subrahmanyam, and seminar participants at the Singapore Management University and University of Missouri Columbia for helpful comments. We are grateful for the comments of an anonymous referee and Terrance Odean (the editor). We thank I/B/E/S for providing analyst earnings forecast data. Zhang acknowledges financial support from the Research Committee of Singapore Management University and the Lee Foundation.


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