Institutional Investors and the Informational Efficiency of Prices

Abstract

The percentage of U.S. equity held by institutional investors has quadrupled in the past four decades, and a prominent share of trading activity is due to institutions. Yet we know little about how institutions affect the informational efficiency of share prices, one important dimension of market quality. We study a broad cross-section of NYSE-listed stocks between 1983 and 2003, using measures of the relative informational efficiency of prices constructed from transaction data. We find that stocks with greater institutional ownership are priced more efficiently in the sense that their transaction prices more closely follow a random walk. Moreover, efficiency improves following exogenous shocks in institutional ownership. Finally, we demonstrate that increases in actual institutional trading volume are associated with greater efficiency, an effect that appears to be distinct from the effect associated with cross-sectional differences in institutional holdings.

Short Selling during Extreme Market Movements

“…Specifically, we test whether short sellers are able to predict negative returns after the event day. Several studies document that short selling at the daily level contains information about future stock price declines (Diether, Lee, and Werner, 2009;Boehmer, Jones, and Zhang, 2008;and Boehmer and Wu, 2008). The objective our tests is to determine whether short sellers that trade in the direction that markets move are less concerned with the price of stocks in the next few days and instead are attempting to capitalize on the price decrease on down days.…”

“…Diether, Lee, and Werner (2009) argue that informed investors are able to short stocks that become overvalued or out of line with their fundamental value while documenting the short sellers are contrarian in contemporaneous and past returns. Boehmer and Wu (2008) show that the contrarian behavior of short sellers assists in the informational efficiency of stock prices. In particular, Boehmer and Wu find that short selling at the daily level reduces pricing errors suggesting that when stocks become temporarily overvalued, informed investors short these stocks thus reducing any further overvaluation.…”

“…Diether, Lee, and Werner (2009) and Boehmer and Wu (2008) document that short sellers, who are contrarian in contemporaneous returns, add to the informational efficiency in stock prices by targeting stocks that become overvalued. Our general results show consistency with this idea.…”

Market Quality and Structural Changes in the Trading System: The Case of X-Stream on the Colombian Stock Exchange

“…In a similar vein, Stoll (2006) argues that delays in order execution leads to higher opportunity costs. Higher execution speeds enhance the efficiency of price formation (Boehmer and Kelley, 2009). The faster the trading mechanisms, the more transparent the price formation is (Barclay, Hendershott, and McCormick, 2003).…”

Sunshine Trading: Flashes of Trading Intent at the Nasdaq

“…Like Kelley (2009) andBoehmer, Chava, andTookes (2010), we calculate intra-day first-order autocorrelation |AR|, using 30-minute and 5-minute quote midpoint return data, and correct for the negative bias in autocorrelations: Fuller (1976). After the correction for the negative bias in the autocorrelation of returns, the mean and median autocorrelation at the 5-and 30-minute aggregation investigated remain negative and are statistically different from zero.…”