DO INSTITUTIONAL INVESTORS WHO HOLD LARGE STAKES OVER LONG HORIZONS HAVE PRIVATE INFORMATION ABOUT FUTURE PERFORMANCE?

Prior studies fail to find that dedicated institutional investors (those characterized by long trading horizons and high ownership stakes in portfolio firms) trade in anticipation of future performance. In this study, I find that dedicated institutions sell shares of bankrupt firms at least one quarter ahead of the bankruptcy quarter. Stock sales by dedicated institutions are greater for bankrupt firms that ultimately are liquidated or reorganized with zero equity to pre-petition shareholders than for bankrupt firms that ultimately are liquidated or reorganized with positive equity to pre-petition shareholders. I infer that dedicated institutions sell shares based on private information about future bankruptcies. In contrast, I find no evidence that transient institutional investors (those characterized by short trading horizons and low ownership stakes in portfolio firms) sell shares based on private information about future bankruptcies.In a more general setting of all firms they hold, I find that dedicated institutions trade in anticipation of price changes from one to 24 months in the future (price changes over the long term); that dedicated institutions respond more than transient institutions to future price changes from month seven to month 24 (price changes beyond the short term); and based on supplementary analysis, dedicated institutions respond less than transient institutions to future price changes from month one to month three (price changes within the short term). These findings are consistent with dedicated institutions responding to private information about future performance before transient institutions.