An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Brian J. Bushee
University of Pennsylvania

Theodore H. Goodman
University of Arizona

Abstract: Recent work suggests that institutional investors can trade profitably based on private information about earnings and returns. We contribute to this literature by (1) testing whether private information proxies are associated with the creation and liquidation of informed positions, (2) introducing private information proxies that reflect the size and nature of an institution’s position in each portfolio firm, and (3) using a methodology that simultaneously examines multiple investor characteristics. We find that changes in ownership by institutions that have large positions in a specific firm are consistent with informed trading. Other previously-documented proxies for private information produce results that are more consistent with risk-based trading or that are insignificant in the presence of the other proxies. Interaction tests reveal that informed trading is most evident when large positions in firms are newly initiated and held by investment advisers or large institutions.

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