INVESTIGATION ON INSTITUTIONAL INVESTORS’ AND STOCK ANALYSTS’ ABILITY TO EXTRACT AND ACT ON THE INFORMATION CONTENT OF STOCK PRICE CRASHES

Abstract

This paper seeks to investigate the ability of institutional investors and stock analysts to extract the information content of a stock price crash about upcoming regime shift in a firm’s performance distribution. Our research shows that both institutional investors and stock analysts are able to extract and act on the information, albeit at a varying degree. Transient institutional investors and investment companies are the best in extracting and incorporating the information content of the stock price crash into their information system. Stock analysts are also able to incorporate the information content, although at a slower rate than institutional investors, as analysts seem to react to the decline in demand from institutional investors before they drop their coverage.