Do Transient Institutions Overreact to Small Negative Earnings Surprises?

We use a proprietary database of institutional investors’ daily stock transactions to examine transient institutions’ trading behavior in response to announcements of small negative earnings surprises (defined as quarterly earnings that fall short of analysts’ consensus forecasts by one cent). Transient institutions’ average selling in response to small negative earnings surprises is significant and is greater than transient institutions’ average selling in response to large negative earnings surprises less than - 1 cent. Transient institutions’ selling in response to small negative earnings surprises is positively associated with the contemporaneous abnormal stock returns. However, transient institutions’ selling in response to small negative earnings surprises is positively associated with the abnormal returns in the three months subsequent to the earnings announcement window, suggesting that transient institutions’ trading response is informative. Our results do not support the common managerial allegation that transient institutions overreact to announcements of small negative earnings surprises.