Institutional Investor Coordination and Firms’ Information Environments

Abstract

This study examines the impact of institutional investor coordination on firms’ capital market outcomes. I proxy for investor coordination by constructing networks of institutional investors who share common investments. Holding both the level and concentration of institutional ownership constant, I find that investor coordination is associated with a higher probability of informed trading and wider bid-ask spreads. Overall, results suggest that institutional investor coordination exacerbates the information disadvantage that other non-coordinating investors face in capital markets. However, institutional investor coordination can be beneficial in certain settings. Specifically, my results show that investor coordination is associated with a faster speed of price discovery in the short-window around public disclosures. These findings hold when studying within-firm changes in the number of institutional investors who are expected to be coordinating. In cross-sectional analyses, I find that the effects of coordination are stronger in settings where there is likely to be a greater amount of institutional investor interaction and connectedness.