PREDISCLOSURE INFORMATION AND INSTITUTIONAL OWNERSHIP - A CROSS-SECTIONAL EXAMINATION OF MARKET REVALUATIONS DURING EARNINGS ANNOUNCEMENT PERIODS

Institutional investors have strong incentives to search for private p redisclosure information about companies in their portfolios because o f their fiduciary responsibilities and large resource bases. In additi on, large institutional ownership may induce a high level of voluntary disclosure prior to earnings announcements. Greater private informati on acquisition and greater levels of voluntary disclosures prior to ea rnings releases suggest that the content of the earnings releases by f irms with higher institutional ownership is partially preempted in pre disclosure market prices. This paper tests the hypothesis that the mar ket price response to the earnings announcements is smaller for securi ties with higher institutional holdings. The empirical tests provide e vidence that the higher the institutional holdings, the lower the mark et reaction to earnings releases after controlling for security capita lization and the number of analysts following the firm.