DP6390 Caught On Tape: Institutional Trading, Stock Returns, and Earnings Announcements

Author(s): John Y Campbell , Tarun Ramadorai , Allie Schwartz

Publication Date: July 2007

Keyword(s): earnings announcements , institutions , liquidity , post-earnings-announcement-drift , trading

JEL(s): G12 , G14

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP6390.asp.asp

Many questions about institutional trading can only be answered if one can track high-frequency changes in institutional ownership. In the U.S., however, institutions are only required to report their ownership quarterly in 13-F filings. We infer daily institutional trading behaviour from the “tape”, the Transactions and Quotes database of the New York Stock Exchange, using a sophisticated method that best matches quarterly 13-F data. We find that daily institutional trades are highly persistent and respond positively to recent daily returns but negatively to longer-term past daily returns. Institutional trades, particularly sells, appear to generate short-term losses - possibly reflecting institutional demand for liquidity - but longer-term profits. One source of these profits is that institutions anticipate both earnings surprises and post-earnings-announcement drift. These results are different from those obtained using a standard size cutoff rule for institutional trades.