Institutional Investors and the Informational Efficiency of Prices (2024)

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Volume 22 Issue 9 September 2009
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Ekkehart Boehmer

Lundquist College of Business, University of Oregon and Mays Business School, Texas A&M University

Send correspondence to Ekkehart Boehmer, Mays Business School, Texas A&M University, College Station, TX 77843-4218; telephone: 979-845-1224; Fax:

979-845-3884

. E-mail: eboehmer@mays.tamu.edu.

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Eric K. Kelley

Eller College of Management, University of Arizona

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The Review of Financial Studies, Volume 22, Issue 9, September 2009, Pages 3563–3594, https://doi.org/10.1093/rfs/hhp028

Published:

17 April 2009

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    Ekkehart Boehmer, Eric K. Kelley, Institutional Investors and the Informational Efficiency of Prices, The Review of Financial Studies, Volume 22, Issue 9, September 2009, Pages 3563–3594, https://doi.org/10.1093/rfs/hhp028

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Abstract

Using a broad panel of NYSE-listed stocks between 1983 and 2004, we study the relation between institutional shareholdings and the relative informational efficiency of prices, measured as deviations from a random walk. Stocks with greater institutional ownership are priced more efficiently, and we show that variation in liquidity does not drive this result. One mechanism through which prices become more efficient is institutional trading activity, even when institutions trade passively. But efficiency is also directly related to institutional holdings, even after controlling for institutional trading, analyst coverage, short selling, variation in liquidity, and firm characteristics.

© Oxford University Press 2009

JEL

G12 - Asset Pricing; Trading volume; Bond Interest Rates G14 - Information and Market Efficiency; Event Studies; Insider Trading

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Greetings, enthusiasts of financial studies and market efficiency. I am well-versed in the intricacies of institutional investors and the informational efficiency of prices, with a profound understanding of the concepts elucidated in the article titled "Institutional Investors and the Informational Efficiency of Prices" by Ekkehart Boehmer and Eric K. Kelley, published in The Review of Financial Studies, Volume 22, Issue 9, in September 2009.

To establish my credibility, let me delve into the key concepts and findings of the article. The authors employ a comprehensive panel of NYSE-listed stocks spanning the period from 1983 to 2004, conducting a meticulous examination of the relationship between institutional shareholdings and the relative informational efficiency of prices. This efficiency is measured by deviations from a random walk.

One of the central revelations of the study is that stocks with greater institutional ownership exhibit a higher level of pricing efficiency. Remarkably, the authors assert that this phenomenon is not solely driven by variations in liquidity, thus challenging conventional assumptions about the relationship between liquidity and pricing efficiency.

The article sheds light on the pivotal role of institutional trading activity in enhancing pricing efficiency. Even when institutions engage in passive trading, their activity contributes to the overall efficiency of prices. However, the authors astutely highlight that efficiency is not solely a byproduct of trading activity; it is also inherently linked to institutional holdings. This connection persists even after meticulous control for various factors, such as institutional trading, analyst coverage, short selling, liquidity variations, and firm characteristics.

The authors use a robust methodology, incorporating a wide array of factors and a substantial dataset, adding credibility to their findings. The study is framed within the context of asset pricing and market efficiency, with a specific focus on trading volume, bond interest rates (JEL G12), and information and market efficiency (JEL G14).

In conclusion, Boehmer and Kelley's work provides valuable insights into the intricate dynamics between institutional investors and the efficiency of prices in financial markets. The rigorous analysis and compelling evidence presented in the article contribute significantly to our understanding of how institutional presence shapes market dynamics and influences price information efficiency. If you have the opportunity, I highly recommend delving into the complete article for a more comprehensive grasp of the nuanced relationships explored by these esteemed scholars.

Institutional Investors and the Informational Efficiency of Prices (2024)

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