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We use a proprietary dataset to test the implications of several asymmetric information models on how short-lived private information affects trading strategies and liquidity provision. Our identification rests on information acquisition before analyst recommendations are publically announced. We provide the first empirical evidence supporting theoretical predictions that early-informed traders “sell the news” after “buying the rumor.” Further, we find distinct profit-taking patterns across different classes of institutions. Uninformed institutions, but not individuals, emerge 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.


Required Publisher Statement
© Michael G. Foster School of Business, University of Washington 2017. Final version 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. Reprinted with permission. All rights reserved.