Institutional Investors and Equity Returns: Are Short-term Institutions Better Informed?

This paper examines the relation between institutions' investment horizons and their informational roles in the stock market. Using quarterly institutional holdings for the period from 1980 to 2003, we show that the positive relation between institutional ownership and future stock returns documented in Gompers and Metrick (2001) is driven by short-term institutional investors. Furthermore, we find strong evidence that short-term institutions' trading forecasts future stock returns. This finding suggests that short-term institutions possess superior information about future returns.