Petroni finds institutional investors
have informational advantage

In a recent study, the Broad School's Kathy Petroni, the Deloitte/Michael Licata Professor of Accounting, demonstrates that transient institutional investors seem able to predict - at least one quarter in advance - when a firm will have a decline in earnings after a string of consecutive earnings increases. She also found that their predictions are likely the result of firm management leaking news of the impending break directly to the institutional investors.

Petroni and co-author Bin Ke, associate professor at the Smeal College of Business at Pennsylvania State University and former doctoral student at the Broad School, conclude that the information is likely leaked during closed conference calls. The information, however, is not very timely since, as Petroni explains, the institutional investors "sell shares only one quarter before the break announcement, while share prices start to decline two to three quarters prior to the break."

The paper, "How informed are actively trading institutional investors? Evidence from their trading behavior before a break in a string of consecutive earning increases" is available on the Social Science Research Network Electronic Library and has been accepted for publication in the Journal of Accounting Research.

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