Document Type
Article
Date
3-23-2026
Keywords
institutional investors, informational efficiency, market efficiency, index funds, disclosure, transparency, post-earnings announcement drift, earnings response coefficients
Language
English
Acknowledgements
This paper was previously titled Passive Institutional Ownership and Post-Earnings Announcement Drift. We thank our editor (Linda Myers) and two anonymous referees for many insightful suggestions. This paper also benefited from comments and suggestions from Derek Jerina, Jeff Kubik, Jim McKeown, workshop participants at Syracuse University, and conference participants at the JAAF conference.
Disciplines
Business
Description/Abstract
We examine how passive institutional ownership affects the informational efficiency of stock prices. Because passive institutional investors prefer greater transparency, their presence encourages managers to enhance firm disclosure (Boone & White, 2015; Schoenfeld, 2017). Increased disclosure improves the information environment and reduces information uncertainty, leading to lower post-earnings announcement drift (PEAD) and greater price efficiency (Hung et al., 2015; Zhang, 2006). Accordingly, we predict that higher passive institutional ownership strengthens the contemporaneous market response to earnings announcements while mitigating PEAD. Using firm additions to the S&P 500 index as an exogenous shock, we document that increases in passive institutional ownership lead to greater firm disclosure. Consistent with our prediction, we find higher earnings response coefficients (ERC) and weaker PEAD among firms with greater passive institutional ownership. Decomposing earnings into firm-specific and systematic components, we further show that the higher ERC and weaker PEAD arise from the timely incorporation of both components into prices. Our findings contribute to the ongoing debate on whether the rise of passive investing enhances or impairs price efficiency.
Recommended Citation
Hu, J., & Liang, L. (2026). Passive Institutional Ownership and the Informational Efficiency of Stock Prices. Journal of Accounting, Auditing & Finance.
Source
submission
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License
