Investor heterogeneity and earnings announcements.

Abstract

Recently, a significant line of inquiry has developed around the information asymmetry prevalent in the market at the time of an earnings news release. Some models predict an increase in asymmetry after an announcement, as evidenced by an increase in volume, due to differences in the abilities of different classes of investors to interpret and react to earnings news. In this study, I investigate whether the trading reactions of different investor groups (individuals, institutions, members, specialists and program trades) differ following an earnings announcement. In addition, I test whether the sophisticated investor groups use this opportunity to trade profitably. For this purpose, I use a new data set (the TORQ data base) that allows me to identify the trader categories of investors participating in each trade. The results of this study indicate that the trading of sophisticated groups (institutions, members) varies considerably from that of naive trading groups (individuals). Analysis of returns from trading in the entire set of sample companies in select periods after announcement shows that the information advantage gained does not translate into abnormal returns for any investor group that initiates trades. Analyzing returns from trading in large companies shows that institutional investors profit from their trades in such companies. But, the performance of both individual and institutional traders in small companies is mixed.