Trading in the Presence of Short-Lived Private Information: Evidence from Analyst Recommendation Changes

dc.contributor.authorKadan, Ohad
dc.contributor.authorMichaely, Roni
dc.contributor.authorMoulton, Pamela
dc.description.abstractWe study how short-lived private information affects trading strategies and liquidity provision. Our empirical identification rests on information acquisition before analyst recommendations are publically announced. Consistent with theory, institutional investors who are likely to possess short-lived private information on average “buy the rumor and sell the news,” buying before analyst upgrades and selling when upgrades are announced. When we go beyond existing theory, we find that different classes of informed institutions differ in their profit-taking patterns, reflecting variations in their trading horizons and motives. The returns to holding private information are economically large. Individuals, who are unlikely to be informed early, buy on upgrade announcements but not before. Institutions that are not attentive to firm-specific news appear to suffer from a winner’s curse, emerging as de-facto liquidity providers to better-informed institutions. Placebo tests confirm that these trading patterns are unique to situations in which some investors have a short-lived informational advantage.
dc.description.legacydownloadsMoulton22_Trading.pdf: 397 downloads, before Aug. 1, 2020.
dc.relation.hasversionThis work has been revised and is forthcoming as: Kadan, O., Michaely, R., & Moulton, P. C. (2017). Trading in the presence of short-lived private information: Evidence from analyst recommendation changes. Journal of Financial and Quantitative Analysis.
dc.rightsRequired Publisher Statement: Copyright held by the authors.
dc.subjectprivate information
dc.subjectanalyst recommendations
dc.subjectinstitutional trading
dc.subjectindividual trading
dc.titleTrading in the Presence of Short-Lived Private Information: Evidence from Analyst Recommendation Changes
local.authorAffiliationKadan, Ohad: Washington University- Saint Louis
local.authorAffiliationMichaely, Roni: Cornell University
local.authorAffiliationMoulton, Pamela: Cornell University School of Hotel Administration


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