Are Institutions Informed about News?

Abstract

JEL:G11 G12 G14 G24 a b s t r a c t This paper combines daily buy and sell institutional trading volume with all news announcements from Reuters. Using institutional order flow (buy volume minus sell volume) we find a variety of evidence that institutions are informed. Institutional trading volume predicts the occurrence of news announcements. Institutional order flow predicts (i) the sentiment of the news; (ii) the stock market reaction on news announcement days; (iii) the stock market reaction on crisis news days; and (iv) earnings announcement surprises. These results suggest that significant price discovery related to news stories occurs through institutional trading prior to the news announcement date.