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IQ from IP: simplifying search in portfolio choice

Chen, Huaizhi, Cohen, Lauren, Gurun, Umit, Lou, Dong and Malloy, Christopher (2019) IQ from IP: simplifying search in portfolio choice. Journal of Financial Economics. ISSN 0304-405X (In Press)

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Using a novel database that tracks web traffic on the SEC’s EDGAR server between 2004 and 2015, we show that institutional investors gatherinformation on a very particular subsetof firmsand insiders, and their surveillance is very persistentover time.This tracking behavior has powerful implications for their portfolio choice, and its information content. An institution that downloaded an insider-trading filing by a givenfirm last quarter increases itslikelihood of downloading an insider-trading filing onthe same firm by more than 41.3%this quarter. Moreover, the average tracked stock thataninstitution buys generates annualized alphas ofover12%relative to the purchase of an average non-tracked stock. We find that institutional managers tend to track members of the top management teams of firms (CEOs, CFOs, Presidents, and Board Chairs), and tend to share educational and location-based commonalities with the specific insiders they choose to follow. Collectively, ourresults suggestthat the information in tracked trades is important for fundamental firm value and is only revealed following the information-rich dual trading by insidersand linked institutions.

Item Type: Article
Additional Information: © 2019 Elsevier B.V.
Divisions: LSE
Subjects: H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions
Date Deposited: 08 Jul 2019 14:42
Last Modified: 22 Jan 2020 00:24

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