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Time-series analysis reveals that growing institutional investor numbers reduce the market relevance of corporate earnings, indicating improved risk sharing weakens reliance on earnings reports.
We find empirical evidence that the temporal increase in the number of institutional investors in the stock market is related to the decrease in the relevance of firms' earnings over time. This relation is: (1) apparent primarily in the short term, (2) unidirectionally Granger-causal, (3) time-invariant, (4) driven by transient and quasi-indexing institutions, and (5) obtained after controlling for time trends, several potential risk factors, and various stock market and economy characteristics. Overall, these results are consistent with the hypothesis that, due to an improvement in the risk sharing among institutional investors, the increase in their quantity in the stock market has weakened their incentives to use earnings information.
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Anchev et al. (2026) studied this question.
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