Article2009

Institutional Investors and the Informational Efficiency of Prices

763 citations0/0 files storedReview of Financial Studies

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Financial Markets and Investment Strategies Corporate Finance and Governance Financial Analysis and Corporate Governance

Abstract

Using a broad panel of NYSE-listed stocks between 1983 and 2004, we study the relation between institutional shareholdings and the relative informational efficiency of prices, measured as deviations from a random walk. Stocks with greater institutional ownership are priced more efficiently, and we show that variation in liquidity does not drive this result. One mechanism through which prices become more efficient is institutional trading activity, even when institutions trade passively. But efficiency is also directly related to institutional holdings, even after controlling for institutional trading, analyst coverage, short selling, variation in liquidity, and firm characteristics.

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References

1970EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK*1936The General Theory of Employment, Interest and Money.1970Efficient Capital Markets: A Review of Theory and Empirical Work 1985Continuous Auctions and Insider Trading 1992A Simple Model of Herd Behavior 1985Bid, ask and transaction prices in a specialist market with heterogeneously informed traders 1969A General Equilibrium Approach To Monetary Theory 1988Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test

Cited by

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