"What Drives the Return Predictive Power of Institutional Ownership - Information or Noise Trading?"



Relative change in the number of institutional investors (N_Chg) has strong predictive power of short-run future stock return. After the autocorrelation in change in institutional share ownership (Pct_Chg) is controlled, Pct_Chg is also positively related to short-run future stock return. Contrary to conventional wisdom, the anomaly is not driven by superior information of institutional investors. Moreover, evidence from the paper clearly shows that institutional investors are on average uninformed about future innovations in corporate fundamentals. Finally, N_Chg and Pct_Chg are both found to be positively related to short-run future abnormal trading volume, and the relations between N_Chg/Pct_Chg and future return/volume are stronger for the stocks more prone to speculative trading, which are consistent with an alternative ‘noise trading’ explanation.
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Contact information:
Sebastian Gryglewicz