Institutional trading, news, and accounting anomalies

Previous studies find mixed evidence on whether institutional investors exploit capital market anomalies. Examining a large sample of accounting-based anomalies, we find that institutions trade in the wrong direction of overreaction anomalies, but in the right direction of underreaction anomalies. These heterogenous trading patterns, rather than reflecting institutions' differential anomaly trading skills, can be simply explained by institutions' tendency to trade in the same direction as the sentiment of news. Examining earnings news and a comprehensive sample of newswire releases, we find strong support for this explanation. Finally, institutional trading appears to exacerbate (mitigate) mispricing associated with overreaction (underreaction) anomalies.