Short-term institutions’ information advantage and overvaluation

Brian Du, Alejandro Serrano, Andre Vianna

Research output: Contribution to journalArticlepeer-review

Abstract

Prior literature has documented that institutions which trade more frequently are better able to forecast future returns and have an informational advantage. This study examines a proximate explanation for the differences in performance based on institutions’ investment horizon – short-term institutions are better informed because they are better able to identify overvalued stocks that are short-sale constrained and overvalued in the context of Miller's (1977) overvaluation hypothesis. Analysis is conducted on 6330 unique firms from 1996 to 2014 using the calendar-time portfolio approach where abnormal returns are estimated from the Fama-French-Carhart four-factor regression model. The results provide evidence that stocks which are extremely overvalued due to short-sale constraints have the greatest decline in short-term institutional ownership, consistent with the notion that short-term institutions are able to correctly assess the components for stock overvaluation.

Original languageEnglish (US)
Article number101299
JournalNorth American Journal of Economics and Finance
DOIs
StateAccepted/In press - 2020

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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