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Asian Review of Financial Research, Vol., No..
pp.227~274
pp.227~274
Local Institutional Investors, Information Asymmetries, and Equity Returns
Bok Baik Department of Accounting, College of Business, Florida State University Tallahassee
Jun-Koo Kang Department of Finance, The Eli Broad College of Business, Michigan State University, East Lansing
Jin-Mo Kim Department of Finance, Information Missouri?Kansas City, Kansas City, MO
In this paper we examine the informational role of local institutional investors in stock markets. Using state identifiers as our primary measure of geographic proximity and geographically proximate institutions as a close approximation to informed investors, we show that both the level of and change in local institutional ownership predict future stock returns; in contrast, such predictive abilities are relatively weak for nonlocal institutional ownership. Moreover, the positive relation between local institutional holdings and stock performance is pronounced in firms with high information asymmetry, such as small firms, firms with high return volatility, firms with high R&D intensity, and young firms. Finally, we find that local, but not nonlocal, institutional investors begin to reduce their holdings prior to a break in a string of consecutive nonnegative quarterly earnings surprises. These findings suggest that geography proxies for the availability of information and allows local institutional investors to execute profitable trades based on their superior information.
Bok Baik
Jun-Koo Kang
Jin-Mo Kim
In this paper we examine the informational role of local institutional investors in stock markets. Using state identifiers as our primary measure of geographic proximity and geographically proximate institutions as a close approximation to informed investors, we show that both the level of and change in local institutional ownership predict future stock returns; in contrast, such predictive abilities are relatively weak for nonlocal institutional ownership. Moreover, the positive relation between local institutional holdings and stock performance is pronounced in firms with high information asymmetry, such as small firms, firms with high return volatility, firms with high R&D intensity, and young firms. Finally, we find that local, but not nonlocal, institutional investors begin to reduce their holdings prior to a break in a string of consecutive nonnegative quarterly earnings surprises. These findings suggest that geography proxies for the availability of information and allows local institutional investors to execute profitable trades based on their superior information.