Accounting Papers

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Journal Article

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Journal of Accounting Research





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Recent work suggests that institutional investors execute profitable trades based on private information about earnings and returns. We provide new evidence on the prevalence and sources of such informed trading by (1) testing for the creation and liquidation of positions based on private information, (2) introducing private information proxies that reflect the size and nature of an institution's position in each portfolio firm, and (3) using a methodology that examines multiple investor characteristics simultaneously at the institution-firm level. We find that changes in ownership by institutions with large positions in a firm are consistent with informed trading. However, other previously documented proxies for private information produce results more consistent with risk-based trading (e.g., investment style) or insignificant in the presence of other proxies (e.g., fiduciary type). We also find that informed trading is more prevalent in small firms and when the large positions are taken by investment advisers and large institutions.

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This is the peer reviewed version of the following article: BUSHEE, B. J. and GOODMAN, T. H. (2007), Which Institutional Investors Trade Based on Private Information About Earnings and Returns?. Journal of Accounting Research, 45: 289–321. , which has been published in final form at doi: 10.1111/j.1475-679X.2007.00234.x This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving

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Date Posted: 27 November 2017

This document has been peer reviewed.