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RFS Advance Access originally published online on April 17, 2009
Review of Financial Studies 2009 22(9):3563-3594; doi:10.1093/rfs/hhp028
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© The Author 2009. 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 the Informational Efficiency of Prices

Ekkehart Boehmer
Lundquist College of Business, University of Oregon and Mays Business School, Texas A&M University

Eric K. Kelley
Eller College of Management, University of Arizona

Send correspondence to Ekkehart Boehmer, Mays Business School, Texas A&M University, College Station, TX 77843-4218; telephone: 979-845-1224; Fax: 979-845-3884. E-mail: eboehmer{at}mays.tamu.edu.

JEL Classification: G12, G14


  Abstract

Using a broad panel of NYSE-listed stocks between 1983 and 2004, we study the relation between institutional shareholdings and the relative informational efficiency of prices, measured as deviations from a random walk. Stocks with greater institutional ownership are priced more efficiently, and we show that variation in liquidity does not drive this result. One mechanism through which prices become more efficient is institutional trading activity, even when institutions trade passively. But efficiency is also directly related to institutional holdings, even after controlling for institutional trading, analyst coverage, short selling, variation in liquidity, and firm characteristics.

We are grateful to Kerry Back, Paul Bennett, Tarun Chordia, Pat Fishe, Joachim Grammig, Joel Hasbrouck, Shane Johnson, Charles Jones, Toby Moskowitz (the editor), Christo Pirinsky, Gideon Saar, Rick Sias, S. "Vish" Viswanathan, two anonymous referees, and participants at the 2005 meeting of the NBER Microstructure Group, the 2006 Utah Winter Finance Conference, the 2007 American Finance Association meetings, University of Missouri, University of Tilburg, University of Tuebingen, Texas A&M University, and Texas Tech University for their comments. We thank the NYSE for providing part of the data, and Kelley is grateful for financial support through the Mays Business School Postdoctoral Fellowship program.


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