Title: Do Transient Institutions Overreact to Small Negative Earnings Surprises? for This Workshop Only Do Not Quote Do Not Circulate Do Transient Institutions Overreact to Small Negative Earnings Surprises?

Using a proprietary database of institutional investors’ stock transactions, we examine whether transient institutions overreact to the announcement of small negative earnings surprises defined as quarterly earnings that fall short of analysts’ consensus forecasts by one cent. Transient institutions’ selling in response to the announcement of small negative earnings surprises is significant and is greater than transient institutions’ selling in response to the announcement of large negative earnings surprises. Furthermore, transient institutions’ selling in response to the announcement of small negative earnings surprises is positively associated with the contemporaneous abnormal stock return. However, transient institutions’ selling in response to the announcement of small negative earnings surprises is positively associated with the abnormal return in the three months subsequent to the earnings announcement window, suggesting that transient institutions’ trading response to small negative earnings surprises is not an overreaction that results in a temporary stock mispricing. Our results are inconsistent with the common managerial allegation that transient institutions would dump a firm’s shares indiscriminatingly whenever there is a small shortfall of reported earnings versus analysts’ consensus forecasts.