Earnings News and Institutional Trading

Abstract

This paper examines how institutions trade in response to earnings news. The key result is that institutions do not seem to engage in momentum trading in response to past earnings news, especially bad news. In multivariate tests, there is significant evidence of momentum trading in response to past returns but not with respect to past earnings news. Momentum trading is strengthened, however, when past returns are accompanied by earnings news of the same sign. There is no evidence that momentum trading in response to past returns is the result of trading in anticipation of earnings news. There is some evidence that institutions engage in contrarian behavior in response to sequences of good or bad news which is consistent with the representativeness hypothesis of Barberis, Shleifer, and Vishny (1998).

Note: This is a revised and retitled version of "Are Institutions Momentum Traders?"

Keywords: Momentum, Institutional trading, Earnings

JEL Classification: G10, G14, G20