How Investors Trade Around Interim Earnings Announcements

Abstract:   This study focuses on non‐institutional trading behaviour around interim earnings announcements in the emerging market. We separate the stock trading activity of Finnish households into five trading classes and compare the results to institutional trading. Data covering the years 1996–2000 shows that earnings news triggers trading in every trading class. We also find some evidence that actively trading individuals especially (compared to passively trading ones) show increased buying and selling activity before the event compared to the non‐event period. After the event we find that Finnish households in the most active investor class tend to follow a contrarian strategy, especially selling after good news. This adds to previous evidence by Grinblatt and Keloharju (2000b) . Furthermore, the performance of the active investor classes is superior to that of passive ones. Finally, the institutional trading class is clearly less affected by the announcement than the active investor classes, suggesting that institutions utilize a broader information set than individual investors.     

Institutional trading,information production,and corporate spin-offs

We use a large sample of transaction-level institutional trading data to analyze, for the first time in the literature, the role of institutional investors as producers of information around corporate spin-offs. Our results may be summarized as follows. First, there is a significant imbalance in post-spin-off institutional trading between the equity of new parent firms versus subsidiaries, suggesting that spin-offs increase institutional investors' welfare by relaxing a trading constraint. This imbalance in institutional trading is driven by differences in information asymmetry across the two spun-off firm divisions. Second, institutional trading around spin-offs has significant predictive power for the announcement effect of a spin-off and for post-spin-off long-run stock returns. Third, institutional investors are able to realize significant abnormal profits by trading in the subsidiary firm equity in the first quarter post-spin-off. Overall, we show that spin-offs enhance information production by institutional investors, who profit from this enhanced information production.     

The Impact of Information Release on Stock Price Volatility and Trading Volume: The Rights Offering Case

This paper examines whether information released via rights offering announcements induces changes in price volatility and trading volume of underlying stock. The results of this paper provide support for the release of new information via offering announcements and evidence of its effects on price volatility and volume of underlying stock. Specifically, utilization of the announced information by investors is evidenced by greater trading volume following the announcement date than during the pre-announcement period. We interpret this result to mean that informedness dominates consensus. However, stock price volatility decreased from the pre-announcement period to the post-expiration period of rights offerings.     

Insider Trading and Corporate Information Transparency

Our study examines the relation between insider trading and corporate information transparency. We find a negative relation between firms’ information transparency and the economic significance of insider trading, including the amount of insider purchase and sale and the profitability of insider transactions. We also find a negative relation between information transparency and stock price reaction to news of insider trading, which suggests that increases in information transparency preempt insiders’ private information. Our study provides evidence consistent with firms’ transparency-enhancing activities decreasing information asymmetry between insiders and investors by revealing insiders’ private information to investors in a timely manner.     

Institutional Investor Participation and Stock Market Anomalies

This paper investigates the impact of institutional trading volume on stock market anomalies. The paper proposes a measure that evaluates the percentage of total trading volume of a stock accounted for by institutional trades. The empirical analyses using a large sample of firms from 1980–2005 provide strong evidence that the strength of stock market anomalies such as price momentum, post‐earnings announcement drift, the value premium, and the investment anomaly is decreasing in institutional trading volume. Additionally, the effects of institutional trading volume are stronger than those of institutional ownership, the major measure of institutional investor participation in the finance literature. These findings suggest that institutional trading significantly improves stock price efficiency.     

Merger Announcements and Insider Trading Activity: An Empirical Investigation

This paper provides evidence of excess returns earned by investors in acquired firms prior to the first public announcement of planned mergers. The study is distinguished from earlier merger studies in its use of daily holding period returns for the 194 firms sampled. The results confirm statistically what most traders already know. Impending merger announcements are poorly held secrets, and trading on this nonpublic information abounds. Specifically, leakage of inside information is a pervasive problem occurring at a significant level up to 12 trading days prior to the first public announcement of a proposed merger.     

Institutional Traders' Behavior in an Emerging Stock Market: Empirical Evidence on Polish Pension Fund Investors

Abstract:   In this paper, we contribute to the literature on institutional herding and feedback trading by analysing the investment behavior of pension funds on the Polish stock market. Pension funds entered into the stock market due to the national pension system reform in 1999, providing a unique opportunity to receive deeper insight into the behavior of institutional investors in an emerging capital market. Our results show that Polish pension fund investors are to a greater extent involved in herd‐like behavior and pursue feedback trading strategies more often than their counterparts in mature markets. This finding is primarily attributed to a stringent investment regulation and high market concentration. We do not detect, however, that trading by the pension funds exerts significant influence on the future stock prices.     

Options trading volume and stock price response to earnings announcements

We examine the effect of options trading volume on the stock price response to earnings announcements over the period 1996–2007. Contrary to previous studies, we find no significant difference in the immediate stock price response to earnings information announcements in samples split between firms with listed options and firms without listed options. However, within the sample of firms with listed options stratified by options volume, we find that higher options trading volume reduces the immediate stock price response to earnings announcements. This conforms with evidence that stock prices of high options trading volume firms have anticipated and pre-empted some earnings information in the pre-announcement period. We also find that higher abnormal options trading volume around earnings announcements hastens the stock price adjustment to earnings news and reduces post-earnings announcement drift.     

Information costs and liquidity effects from changes in the FTSE 100 list

Abstract

In this paper we examine the stock price effect of changes in the composition of the FTSE 100 over the time period of 1984–2001. Like the S&P 500 listing studies, we find that the price and trading volume of newly listed firms increases. The evidence is consistent with the information cost/liquidity explanation. This is because investors hold stocks with more available information, implying that they have lower trading costs. This explains the increase in the stock price and trading volume of newly listed stocks to the FTSE 100 List. We find the reverse effect for the deletions from the FTSE 100.     

Does Shareholder Composition Matter? Evidence from the Market Reaction to Corporate Earnings Announcements

We examine whether institutional ownership composition is related to parameters of the market reaction to negative earnings announcements. When firms report earnings below analysts' expectations, the stock price response is more negative for firms with higher levels of ownership by momentum or aggressive growth investors. There is no evidence, however, that these institutions cause an “overreaction” to earnings news. Ownership structure is also related to trading volume and to stock price volatility on days around earnings announcements. Our findings are consistent with the idea that the composition of institutional shareholders effects stock price behavior around the release of corporate information.     

Daily Stock Trading by Investor Type and Information Asymmetry: Evidence from the Korean Market

We examine the influence of trading by heterogeneous investors on information asymmetry in the Korean stock market, which includes domestic and foreign institutional investors and individual investors. In particular, we examine the relationship between the daily trading volume and the level of information asymmetry reflected in the stock price. The results reveal that high-volume daily trading by domestic institutional and individual investors increases the degree of information asymmetry in the short term, but is more evident for individual investors. Foreign institutional investors tend to mitigate the information asymmetry. Finally, our findings are robust to an alternative measure of investor trading.     

Predicting earnings in a poor information environment

Financial intermediaries, such as analysts, play an important role in providing information to investors. However, a large segment of the market (about 39% of CRSP firms between 1992 and 2009) is not served by financial analysts, leaving investors in a poor information environment. In this paper, we examine whether other publicly available information signals, such as insider trades, institutional holdings, and firms’ stock repurchases, can be used to predict information about earnings for these firms. We find that CFOs’ trading decisions are associated with new information contained in the annual earnings reports for firms with no or scant analyst coverage. In contrast, for firms with multiple analyst coverage, insider trading decisions are not predictive of new information in earnings reports. Our results suggest that some public information signals, such as insider trades, can be used to alleviate the poor information environment faced by investors. However, the market may not have fully priced the information contained in these signals.     

Does the investment horizon of institutional investors matter for stock liquidity?

This paper examines the role of the investment horizon of institutional investors on stock liquidity of firms. We show that an increase in long-term institutional ownership is negatively associated with firm liquidity, while an increase in short-term ownership is positively related to a firm's stock liquidity. We identify the ownership-liquidity relationship by examining two major channels: the trading activity channel and the informational friction channel. Long-term investors reduce stock liquidity through low frequency trading and access to value-enhancing and private information, which induces adverse selection bias. In contrast, short-term investors improve liquidity through trading activity and competition with other investors, which lowers transaction costs. Our findings further suggest that the effects of an increase in long-term (short-term) institutional investors on liquidity weaken (strengthen) when a firm has more publicly available information. Finally, we show that the positive impact of an increase in long-term ownership on valuation is more pronounced for firms with higher liquidity and the valuation effect is persistent.     

Split Share Structure Reform,corporate governance,and the foreign share discount puzzle in China

We examine the impact of the Split Share Structure Reform on the well-known foreign share discount puzzle in China. Existing literature confirms that foreign investors are more concerned about insider expropriation because of their information disadvantage relative to domestic investors. The split share structure of the ownership of Chinese listed firms created a conflict of interests between state and private shareholders. Since, before the reform, state shareholders held restricted shares that denied them any wealth effect from share price movements, they had a limited incentive to work with private shareholders to ensure that managers maximized the stock market value of the firm. By abolishing the trading restrictions for state shareholders, this reform has increased the incentive alignment between state and private shareholders, encouraging them to monitor managers. If foreign investors’ concerns over the corporate governance implications of the split share structure at least partly contributed to their discounting of Chinese listed firms, then this discount should be reduced following the reform. Indeed, our evidence confirms this prediction, especially among Chinese listed firms with more state ownership or restricted shares. Our findings imply that this significant institutional reform of the Chinese stock market has benefitted minority investors.     

Do institutional investors destabilize stock prices? evidence from an emerging market

In this paper, we provide empirical evidence on the impact of institutional investors on stock market returns dynamics in Poland. The Polish pension system reform in 1999 and the associated increase in institutional ownership due to the investment activities of pension funds are used as a unique institutional characteristic. We find robust empirical evidence that the increase of institutional ownership has changed the autocorrelation and volatility structure of aggregate stock returns. However, the findings do not support the hypothesis that institutional investors have destabilized stock prices. The results are interpretable in favor of a stabilizing effect on index stock returns induced by institutional trading.     

信息不确定、坏消息与投资者交易行为

本文以2000年至2010年的A股上市公司违法违规事件为样本,分析该类事件中信息不确定性的影响,以及市场反应中的投资者交易行为。研究发现:上市公司市场价值在事件日呈显著下跌;然而,与直觉有些相悖的是,信息不确定程度与超额累积收益呈显著正相关,这意味着在坏消息到来时,不确定性反而提高了股票的市场价值;最后,通过对各类投资者在此类事件中的净买入情况分析,我们发现不同投资者的交易行为有明显差异。机构投资者在坏消息中采用了反向交易策略,并且知情交易促进机构投资者的买入。     

Individuals’ Trading Prior to Earnings Announcements

This paper investigates the relationship between individuals’ net trading and stock price movements before and after annual earnings announcements for the Taiwan Stock Exchange. We conduct an event study on the effects of pre‐event individual trade imbalances on pre‐ and post‐announcement abnormal returns. With a unique and comprehensive dataset, we accurately classify executed orders by aggressiveness of order price. The evidence indicates that while individuals, as a group, are not informed about impending earnings announcements, individuals who place aggressive orders are informed as their net trading coincides with contemporaneous and future stock returns. Aggressive individuals lose their edge during the financial crisis. More importantly, the advantage (disadvantage) for individuals who adopt aggressive (passive) orders weakens when foreign institutions own concentrated equity in firms. We also find that net individual trading contains information about abnormal returns that either past returns or volume does not subsume. Controlling for past returns, trading volume and volatility, or using an alternative measure of net individual trading does not change our conclusions.     

Valuation Effects of Greek Stock Dividend Distributions

This study analyses the price reaction to stock dividend distributions by firms listed on the Athens Stock Exchange on both the announcement and the ex‐dividend day. It also analyses earnings per share, dividends per share and trading volume in the pre‐ and post‐announcement periods. The findings show statistically insignificant abnormal returns on both the announcement and the ex‐dividend day. The analysis does not reveal any significant change in earnings per share and dividends per share, but it does reveal a significant decline in the market‐adjusted trading volume in the post dividend period. The findings, based on a different institutional environment, expand the empirical evidence on the value effects of stock dividends.     

Institutional Investors and Information Asymmetry: An Event Study of Self-Tender Offers

Our research compares the asymmetric information costs of firms with low levels of institutional ownership to those with high levels. We use self‐tender offers as an information event. Our results show that higher institutional ownership, particularly a higher number of institutional investors, is associated with a lower degree of informed trading. These results persist even after we control for differences in trading activity among our sample firms.     

Institutional Investor Trading in a Short Investment Horizon: Evidence from the Korean Stock Market

We examine the weekly trading activities of institutional investors in the Korean stock market. First, we find that average net trades by institutional investors this week are negatively related to one-week lagged returns, suggesting that they could be contrarian traders. Second, our finding shows that institutional investors’ net trades this week are positively related to the net trades next week, consistent with persistent trading and/or herding behavior. Third, we find that institutional net trades are positively related to the post one-week returns. Finally, our findings are most pronounced in the group of short-term institutional investors.