Transaction Sizes and Institutional Investor Trading Patterns around Earnings Announcements

• In Event: Effect of Investors on Stock Returns

Abstract

The use of observed transaction sizes to differentiate between “small” and “large” investor trading patterns is widespread. A significant concern in such studies is spurious effects attributable to misclassification of transactions, particularly transactions originating from large investors. Such effects can arise unintentionally, strategically, or endogenously. We employ comprehensive records of institutional trading activity (i.e., “large” traders), including their order sizes and overall position changes, to assess the degree to which such misclassifications can give rise to spurious inferences about “small” and “large” investor trading activities. Our analysis shows that these institutions are heavily involved in small transaction activity. It also shows that they increase their order sizes substantially in announcement periods relative to non-announcement periods, presumably as an endogenous response to the earnings news. And, in the immediate earnings announcement period, transaction size based inferences about their directional trading are quite misleading--producing spurious “small trader” effects and, more surprisingly, erroneous inferences about “large trader” activity.

Authors

• Musa Subasi, University of Missouri–Columbia

• William M Cready, The University of Texas at Dallas

• Abdullah Kumas, University of Richmond