Transient Institutional Investors' Response to Insider Trade following Earnings Announcements

This study examines how institutional investors respond to insider trade in addition to accounting information. I show that transient institutions defined as those with short investment horizon and high turnover, reduce holdings in the following quarters when insiders are net sellers following earnings announcements. Moreover, I show that transient institutions significantly reduce more holdings when insiders are net sellers and firms also meet or beat analyst forecasts. In addition, I show that the greater reduction in transient institutional holdings when insiders are net sellers and firms also meet or beat analyst forecasts do not appear to be affected by earnings management and earnings guidance by managers on analysts' expectations. Finally, I show that insider trade profits in terms of future abnormal returns are lower when transient institutional holdings are higher, suggesting that the incorporation of insider information by transient institutions limits insider profits. Overall, these findings provide evidence on the ability of institutional investors to process insider trade information in addition to accounting numbers.