Changes in Institutional Ownership and Subsequent Earnings Announcement Abnormal Returns

Abstract

Abstract:This study documents an association between change in institutional ownership during a calendar quarter and abnormal returns at the time of the subsequent announcement of quarterly earnings. The result is driven by the portfolio returns of the extreme deciles of changes in institutional ownership, and within the top (bottom) deciles, the third of the stocks with the most positive (negative) skewness of the distribution of changes in institutional ownership. We also show that our results obtain only for institutional investor types with short-term focus. These results suggest informed trading by institutions based on information about forthcoming earnings.

Financial reporting opacity and informed trading by international institutional investors

“…For example, Ali et al (2004) find a positive association between changes in aggregate institutional ownership and abnormal returns at the time of the subsequent earnings announcement, consistent with some institutions making informed trades. Ke and Petroni (2004) find an association between changes in aggregate institutional ownership and breaks in strings of quarterly earnings growth.…”

Inside Agency: The Rise and Fall of Nortel

“…Since the ''transient'' owners arbitrage post-earnings announcement drifts (Ke and Gowda, 2005), trade on expected news (Ali et al, 2004) and are more sensitive to negative earnings surprises (Hotchkiss and Strickland, 2002), managers are provided with no shortage of reasons to manage with a short run perspective.…”

Do institutional investors exploit the post-earnings announcement drift?

“…16 Because Ali et al (2004) show that mutual funds and investment advisors' quarterly ownership changes can predict the stock market's response to the subsequent quarter's earnings announcement (i.e., AR3 tþ1 ), we also include AR3 tþ1 as a control variable in regression model (1). Untabulated regression result indicates that the coefficient on AR3 tþ1 is insignificantly different from zero, while the coefficients on the RSUEs are similar to those in Table 3.…”