INSTITUTIONAL OWNERSHIP AND STOCK MARKET REACTION TO CORPORATE EVENT ANNOUNCEMENTS

Abstract

This study is inspired by the growing interest on institutional ownership and its potentially significant impact on information efficiency. Its objective is to critically examine the elation between the level of institutional ownership and the stock price reaction to various corporate event announcements. The sample comprises US stocks listed on NYSE/AMEX from 1980 to 2006 for which information about the level of institutional ownership is available in Thomson Financial 13f database. To examine the association between the level of institutional ownership and the average daily abnormal returns during the announcement, a combination of standard event study methodology and cross-sectional regression analysis is employed. We find that the magnitude of abnormal returns during the announcement is inversely related to the level of institutional ownership for the events of stock dividends, splits, repurchase, issuance of extra dividends and merger for acquiror firms. The converse is true when announcements of mergers for target firms are studied. In general, our evidence is consistent with the hypothesis that institutional investors decrease the pre-announcement information asymmetry among investors and pre-empt the information content through their monitoring and information acquisition effort.