Investor Heterogeneity and Trading

Abstract

This paper examines the impact of investor heterogeneity on trading. Institutional investors play a crucial role in the information environment of firms. We argue that heterogeneity in the information ability of institutional investors has a significant impact on trading around information releases. We propose novel measures of within-firm investor heterogeneity and find that investor heterogeneity increases abnormal trading volume around news, holding constant the average levels of investor sophistication. We also find larger spread reductions around announcements for firms with greater investor heterogeneity. The effect of investor heterogeneity on trading around news continues to hold after accounting for total institutional ownership, the presence certain types of institutional investors, and analyst coverage.

Keywords: institutional investors, investor heterogeneity, information, trading volume, spreads

JEL Classification: G10, G12, G14