Institutional trading and information processing: Evidence from complicated firms and easy‐to‐analyze firms

Abstract

In this article, I examine institutional trading within two groups of firms with different demands on investor information processing: conglomerate firms and stand‐alone firms. On average, institutional trading in conglomerate firm stocks yields significantly lower returns than institutional trading in stand‐alone firm stocks. Inferior returns following institutional trading in conglomerate firm stocks persist across small and large firms. Moreover, financial institutions with a low concentration of conglomerate firms in their portfolios are more profitable in their trading. This study provides evidence that skilled institutional investors intentionally focus their information‐processing efforts on easy‐to‐analyze firms.