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The purpose of this paper is to investigate if earnings management affects the trades of different investors prior to earnings announcements.
Abstract
Purpose
The purpose of this paper is to investigate if earnings management affects the trades of different investors prior to earnings announcements.
Design/methodology/approach
Using a unique account-level trading data set from the Chinese stock market, the author investigates the different investor trading patterns prior to earnings announcements.
Findings
The author obtains direct evidence to show that: first, institutional investors, particularly active ones, tend to sell (buy) stocks before negative (positive) earnings surprises; second, institutional investors buy stocks intensively with the lowest earnings management and the highest earnings surprises, and the trading patterns are primarily driven by active institutions. No significant trading pattern is observed on the stocks with negative earnings surprises; and third, the author uses a natural experiment in accordance with the Chinese accounting standards reform to address endogeneity, and the causality of the results still holds.
Originality/value
The findings provide clear evidence by emphasizing the importance of earnings management in the formulation of investor decisions.
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Keywords
The aim of this paper is to examine how informed traders, i.e. transient institutional investors that actively trade on information to maximize investment profits, use insider…
Abstract
Purpose
The aim of this paper is to examine how informed traders, i.e. transient institutional investors that actively trade on information to maximize investment profits, use insider trading signals in addition to accounting numbers to mitigate future abnormal returns.
Design/methodology/approach
Using a sample of 44,843 firm‐quarters from 1988 to 2001 in the USA, the paper examines how informed investors use insider trading signals and the extent to which the use of these signals by informed investors impacts insiders' future abnormal returns from trading.
Findings
This study finds that the change in transient institutional ownership in the next‐quarter is positively associated with net insider trading in the current quarter, after controlling for accounting information (including total accruals, unexpected earnings, etc.). In addition, this study finds that insider profits decrease in transient institutional ownership, consistent with the notion that trading by informed investors limits insider profits.
Research limitations/implications
The institutional ownership data are only available on a quarterly basis, which may not capture institutional investors' immediate response to insider trading signals.
Originality/value
This study provides systematic evidence on how informed traders use insider trading signals. This study adds to existing knowledge of the information environment of institutional investors by showing that transient institutional investors use insider trading signals in addition to accounting information in making investment decisions. Moreover, this study contributes to the literature on the determinants of insider profits by providing evidence that informed trading by investors has incremental power to explain insider profits.
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The main thrust of the present study is to look into the trading patterns of behavior and investment performance exhibited by individual and institutional investor categories in…
Abstract
Purpose
The main thrust of the present study is to look into the trading patterns of behavior and investment performance exhibited by individual and institutional investor categories in the Qatar Exchange (QE). The paper aims to discuss these issues.
Design/methodology/approach
The present study uses daily aggregated investment flows made separately by each investor group, as well as daily closing price observations of the QE stock composite index. The trading patterns of investor categories are examined by estimating a bivariate vector autoregressive process of order p, VAR (p). To determine whether each category performs well or poorly over the entire sample period, each investor category's cumulative returns are estimated and analyzed.
Findings
The empirical results reveal that institutional investors pursue positive feedback trading strategies, whereas individual investors tend to be negative feedback traders. Both investor categories appear to be engaged in herding behavior. Additionally, institutional investors perform well over almost the entire sample period. In contrast, individual investors' negative market timing ability dominates their overall poor performance.
Practical implications
The investment performance gap found between institutional investors and individual investors in the Qatari capital market may reflect a large information asymmetry in favour of the former category. Indeed, the poor performance of individual investors implies that their trading activities are generally driven by factors and considerations that are irrelevant to fundamentals. Moreover, their irrational trading decisions may play some role in the formation of asset price bubbles.
Originality/value
The present study makes the first attempt to provide empirical evidence on the investment patterns and performance of individual and institutional investors trading on the Qatari capital market.
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Priyantha Mudalige, Petko S Kalev and Huu Nhan Duong
The purpose of this paper is to investigate the immediate impact of firm-specific announcements on the trading volume of individual and institutional investors on the Australian…
Abstract
Purpose
The purpose of this paper is to investigate the immediate impact of firm-specific announcements on the trading volume of individual and institutional investors on the Australian Securities Exchange (ASX), during a period when the market becomes fragmented.
Design/methodology/approach
This study uses intraday trading volume data in five-minute intervals prior to and after firm-specific announcements to measure individual and institutional abnormal volume. There are 70 such intervals per trading day and 254 trading days in the sample period. The first 10 minutes of trading (from 10.00 to 10.10 a.m.) is excluded to avoid the effect of opening auction and to ensure consistency in the “starting time” for all stocks. The volume transacted during five-minute intervals is aggregated and attributed to individual or institutional investors using Broker IDs.
Findings
Institutional investors exhibit abnormal trading volume before and after announcements. However, individual investors indicate abnormal trading volume only after announcements. Consistent with outcomes expected from a dividend washing strategy, abnormal trading volume around dividend announcements is statistically insignificant. Both individual and institutional investors’ buy volumes are higher than sell volumes before and after scheduled and unscheduled announcements.
Research limitations/implications
The study is Australian focused, but the results are applicable to other limit order book markets of similar design.
Practical implications
The results add to the understanding of individual and institutional investors’ trading behaviour around firm-specific announcements in a securities market with continuous disclosure.
Social implications
The results add to the understanding of individual and institutional investors’ trading behaviour around firm-specific announcements in a securities market with continuous disclosure.
Originality/value
These results will help regulators to design markets that are less predatory on individual investors.
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Kyung Soon Kim, Jinwoo Park and Yun W. Park
The purpose of this paper is to investigate whether there is any difference across individual investors, domestic and foreign institutional investors in trading volume responses…
Abstract
Purpose
The purpose of this paper is to investigate whether there is any difference across individual investors, domestic and foreign institutional investors in trading volume responses to analyst reports. The authors also examine the determinants of trading volume responses using firm as well as forecast characteristics.
Design/methodology/approach
The authors use trading data from the Korean equity market. The authors divide investors into three classes of investors; namely, individual investors, domestic institutional investors, and foreign institutional investors. The authors then examine whether the trading responses to analyst reports vary across investor types, and how firm characteristics and characteristics of analyst reports influence the trading activities on the release dates across investor types.
Findings
Individual investors are the most responsive investor group, being responsive to analyst reports on small, neglected firms with large inside ownership as well as to analyst reports with optimistic forecasts. Domestic institutional investors are responsive to reports on neglected firms with high return volatility while foreign institutional investors show least responses.
Originality/value
There are few studies that investigate whether the trading responses to analyst reports vary across investor types and how firm characteristics and characteristics of analyst reports influence the trading activities on the release dates across investor types. Taking advantage of the trading volume data for the three main investor types in the Korean stock market, the authors study the trading volume responses for each investor type and make comparisons across investor types.
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Keywords
This paper examines the effect of institutional investors on the trading volume reaction to management forecasts of annual earnings. Based on a sample of forecasting firms between…
Abstract
This paper examines the effect of institutional investors on the trading volume reaction to management forecasts of annual earnings. Based on a sample of forecasting firms between 1990 and 1992, institutional investors are examined as heterogeneous types, rather than as a single group as done in prior research. The findings contribute to the growing literature on institutional investor types in two ways: (1) institutional categories differ in their trading patterns, and (2) if the categories are classified into active and inactive types, then greater trading by active institution‐types signals greater investor‐level information asymmetries and greater trading by inactive institution‐types signals lower investor‐level information asymmetries. Overall, the results suggest that increased firm voluntary disclosures, as encouraged by the SEC and the AICPA, may be differentially informative to different types of investors.
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Yu‐Fen Chen, Sheng‐Yung Yang and Fu‐Lai Lin
The purpose of this paper is to: investigate whether the foreign institutional investors in Taiwan herd towards the stocks in the same industry; identify the causes of industrial…
Abstract
Purpose
The purpose of this paper is to: investigate whether the foreign institutional investors in Taiwan herd towards the stocks in the same industry; identify the causes of industrial herding; analyze whether herding behavior impacts future industrial returns; and trace the changing pattern of industrial herding, especially during the 2007‐2008 financial crisis.
Design/methodology/approach
This paper applies Sias' herding measure to identify foreign institutional industrial herding behavior. Moreover, to identify the causes and impacts of herding, the authors use regression models to analyze the relationship between foreign institutional demand for stocks in some particular industries and industrial returns, controlling industrial market capitalization, the number of firms in the industry and industrial speculative intensity. The above methods are applied to the full sample period, as well as two sub‐periods, respectively, to trace the time‐varying trading behavior.
Findings
First, on average, foreign institutional investors herd in the Taiwan securities market. They follow each other into and out of the same industries. Second, they were momentum traders in the tranquil period from 2002 to 2006 and contrarian traders in the period of 2007‐2008 financial crisis. Third, such herding behavior has positive impacts on future industrial returns both in the tranquil period as well as in turbulent time. The authors thus conclude that foreign institutional investors demonstrated contrarian trading strategies to stabilize future industrial returns in the financial crisis period; they buy past losers to support the prices and sell past winners to suppress the price volatility.
Originality/value
This paper investigates foreign institutional herding behavior in an emerging market, Taiwan on the micro setting of industrial base. It identifies the causes and impacts of foreign institutional industrial herding from the outlook of information‐base versus non‐information‐base trading. It also traces time‐varying herding behavior, especially during the 2007‐2008 financial crisis. This paper provides useful information to investors participating in emerging markets like Taiwan.
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This study explores whether institutional investors can distinguish an undervalued share repurchase from a falsely signaled share repurchase. This study also aims to determine…
Abstract
Purpose
This study explores whether institutional investors can distinguish an undervalued share repurchase from a falsely signaled share repurchase. This study also aims to determine what information institutions use when investing in repurchase stocks.
Design/methodology/approach
This study uses unique Taiwanese data and concentrates on foreign institutions because they are the most sophisticated investors in Taiwan.
Findings
The results show that foreign institutional trading in open market repurchase (OMR) stocks will earn both positive concurrent and post-OMR excess returns. In addition, there is a significant positive relationship between pre-OMR insider trading and foreign institutional trading during the OMR period; that is, foreign institutions follow insiders to trade their OMR stocks.
Practical implications
This study finds that foreign institutions use publicly available data on insider trading to choose OMR stocks and create excess returns. This encourages individual investors without private information, who can also earn a positive return if they diligently study available public information.
Originality/value
This study contributes to the international investment literature by determining the price impacts associated with foreigner trading in the firm-level returns of the host country. In addition, this study finds that foreign institutions choose OMRs based on insider trading information, which fills the gap in existing studies on share repurchasing. Moreover, this study enriches the insider literature by showing how foreign institutions can benefit by using insider trading information.
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Shaista Wasiuzzaman and Kean Hua Lim
The ineffectiveness of external governance mechanisms (laws and regulations) designed to curb insider trading in Malaysia leads this study to focus on the role of internal…
Abstract
Purpose
The ineffectiveness of external governance mechanisms (laws and regulations) designed to curb insider trading in Malaysia leads this study to focus on the role of internal governance of firms in helping to reduce insider trading incidences. The purpose of this paper is to investigate the influence on institutional shareholders on insider trading activity.
Design/methodology/approach
The study uses data collected from a sample of 115 firms listed on the Bursa Malaysia over a five-year period (from year 2010 to 2014). Ordinary least squares technique is used to achieve the objective of this study.
Findings
The findings of this study points toward asymmetric information as a motivator for insider trading activity. Unlike previous studies which find the presence of institutional investors helping to reduce insider trading, this study finds results to the contrary.
Originality/value
This study focuses on the influence of institutional shareholdings on insider trading. The results provide more insight into the effectiveness of the role of institutions in curbing insider trading and suggest a closer monitoring of institutional shareholders.
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Jang Hyung Cho, Robert Daigler, YoungHa Ki and Janis Zaima
The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets.
Abstract
Purpose
The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets.
Design/methodology/approach
The Grinblatt et al.'s (1995) measure of momentum strategy is used to estimate the degree momentum and contrarian strategies. Then, regression analysis is used to determine the effects of trading strategies on volatility.
Findings
Up until 2005, the trades by non-clearing member firms in the futures market were separated from institutional traders providing us the opportunity to study trading strategies adopted by large distinct trading groups and its effects on volatility in the futures markets. It is found that individual traders use momentum strategy, whereas market makers and institutional traders use contrarian strategy. Momentum strategy adopted by individual traders increases volatility whereas contrarian strategy dampens volatility. Moreover, it is found that institutional traders engage more actively in contrarian trading when individual traders cause excessive volatility. The two distinct trading groups were separately tracked prior to 2005 giving us a unique window to determine the effect of the traders that conduct momentum trading as opposed to the ones that are contrarian traders. After the reclassification, the institutional trading group exhibited weaker contrarian strategy which can be attributed to the inclusion of non-clearing firm traders.
Originality/value
This study documents the first empirical evidence that shows off-exchange futures trader group is not composed of only pure noise makers, but there are short-term forecasters in its group. The authors also show a unique finding that noises caused by off-exchange group is from momentum strategy that they use, whereas contrarian strategy is used by institutional trader lower volatility.
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