Fundamental Analysis And Institutional Investment

Previous research shows that fundamental signals (financial ratios) derived from publicly available financial statements can predict future abnormal stock returns. This paper examines whether institutional investors trade on these fundamental signals and the implications of institutional investors’ trading for stock valuation. We failed to provide strong evidence that institutional investors trade on fundamental signals. However, we further document that the limited institutional investors’ trades did help reduce the returns related to fundamental signals. This paper provides evidence helping to explain the abnormal returns associated with fundamental signals and contributes to our understanding of institutional investors’ role in enhancing market efficiency.