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RFS Advance Access published online on January 3, 2007
Review of Financial Studies, doi:10.1093/revfin/hhl046
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Copyright © The Author 2007. Published by Oxford University Press.

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

Xuemin (Sterling) Yan and Zhe Zhang
Department of Finance, University of Missouri - Columbia, Columbia, MO 65211-2600
Singapore Management University, Lee Kong Chian School of Business, 50 Stamford Road, Singapore 178899

yanx{at}missouri.edu

joezhang{at}smu.edu.sg

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.


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