Changes in Institutional Ownership and Subsequent Earnings Announcement Abnormal Returns

This study documents an association between changes in institutional ownership during a calendar quarter and abnormal returns at the time of subsequent announcements of quarterly earnings. The result is driven by the portfolio returns of the extreme deciles of changes in institutional ownership, suggesting that institutions trade based on information about future earnings, but that such trading is not widespread. We also find that the difference between earnings announcement returns of the extreme deciles of change in institutional ownership is much greater when change in institutional ownership of a stock is driven by relatively few institutions, measured using the skewness of the distribution of change in institutional ownership of the stock. This result suggests that when fewer differentially informed investors make disproportionately large purchases or sales of stocks, a greater amount of the information on which they base their trades is not impounded in prices until the subsequent earnings announcement. Finally, we show that our results obtain for institutional investors with short-term focus, such as independent advisors, investment companies and insurance companies, but not for institutional investors with long-term focus, such as internally managed pension funds, educational institutions, and private foundations. This result further supports our conclusions regarding informed trading by institutions based on information about forthcoming earnings