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Trading in the Presence of Short-Lived Private Information: Evidence from Analyst Recommendation Changes

Published online by Cambridge University Press:  06 August 2018

Ohad Kadan ,
Roni Michaely  and
Pamela C. Moulton
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Abstract

We use a proprietary data set to test the implications of several asymmetric information models on how short-lived private information affects trading strategies and liquidity provision. Our identification rests on information acquisition before analyst recommendations are publicly announced. We provide the first empirical evidence supporting theoretical predictions that early-informed traders “sell the news” after “buying the rumor.” Further, we find distinct profit-taking patterns across different classes of institutions. Uninformed institutions, but not individuals, emerge as de facto liquidity providers to better-informed institutions. Placebo tests confirm that these trading patterns are unique to situations in which some investors have a short-lived informational advantage.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 4 , August 2018 , pp. 1509 - 1546
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Yakov Amihud, David Brown, Markus Brunnermeier, Jeffrey Busse (the referee), Bidisha Chakrabarty, Jennifer Conrad (the editor), Ryan Davies, Thierry Foucault, Larry Glosten, Itay Goldstein, Michael Goldstein, Terry Hendershott, Jeff Hu, Paul Irvine, Pankaj Jain, Russell Jame, Ron Kaniel, Andrew Karolyi, Marc Lipson, Roger Loh, Tom McInish, Elizabeth Odders-White, Napoleon Overton, Mark Ready, Matt Ringgenberg, Gideon Saar, Eric Sirri, David Smith, Elvira Sojli, Avanidhar Subrahmanyam, Sheridan Titman, Ruslan Tuneshev, and seminar participants at Babson College, Cornell University, Fordham University, Singapore Management University, Tsinghua University, the University of Adelaide, the University at Albany, the University of Lugano, the University of Memphis, the University of Wisconsin at Madison, the 2013 IDC summer conference, the 2014 European Finance Association meeting, the 2014 Financial Management Association meeting, the 2014 Multinational Finance Society symposium, and the University of California, Davis 2014 workshop on information and asset prices for helpful comments. We thank the New York Stock Exchange for providing data, Leonardo Madureira for sharing data with us, and Chris Vincent and Kate Volkova for research assistance.

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