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Institutions Informed: The Impact of News in Finance

This paper discusses the role of informed traders in finance, analyzing institutional trading data and news sentiment to explore causality issues and economic significance. Insights into institutional behavior are provided, highlighting implications for market efficiency.

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Institutions Informed: The Impact of News in Finance

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  1. The Second International Moscow Finance Conference 2012 Are institutions informed about news? T. Hendershott, D. Livdan, N. Schürhoff Discussed by: Sergey Gelman, ICEF, Higher School of Economics, Moscow

  2. Summary (I) • Since Kyle (1985): the role of an informed trader is crucial • Who is informed? • Mutual funds, Short sellers, Corporate insiders. • Are institutions informed? • Up to now: mixed evidence, based mainly on specific news • This paper: using a very comprehensive news sample YES!

  3. Summary (II) • Excellent lit review • A rich dataset: • returns and NYSE institutional trading data on 1667 stocks observed over 2003-2005 (756 trading days) • 126,438 days with news releases from Reuters NewsScope Sentiment Engine Results: • Institutional trading predicts news arrival • Institutional trading predicts news sentiment • Inst. trading predicts (news) returns • Inst. trading predicts earnings surprise

  4. Comments (I) • Causality issue: do institutions cause news or predict (have private info)? • Institutional demand drives prices (Choi, Sias 2012 RFS; Llorente et al. 2002 RFS, Baker and Warner 1993 JFE) • Institutional demand may drive news (indirect evidence: Barber et al. 2007 JFE) • Only in case of earnings surprises alternative causality stories can be majorly ruled out • Possible extension: include prediction of earnings surprise date returns • Possible extension: choose certain type of news, which can not be influenced by institutionals and returns (beside EA)

  5. Comments (II) • Economic significance: 10 b.p.: • small fraction of returns s.d. ≈200 b.p. • Institutions are better informed, but not “the informed” • smaller than transaction costs (average bid-ask spreads for S&P 500 stocks were 16 b.p. in 2002 -2011); • Do institutions trade on the information or just minimize their transaction costs? • High persistence of institutional order imbalance: • link to theoretical models • Splitting order effect, literature on the size of informed trade (Llorente et al. 2002 RFS): Return*volume

  6. Comments (III): Technical • Fixed effects cause problems in all panel equations, not only VAR (use Arellano-Bover (1995)) • Institutional fraction (Choi and Sias 2012 RFS) • Negative sign for volume • Institutionals seem to account for 50% to over 100% of the volume (??). Who is uninformed in the latter case? • Granger causality test instead of IRF • Persistence in sentiment: Effect of a news published several times in different media? • Surprising: simultaneous correlations in VAR low

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