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There has been a steady increase in institutional ownership of penny stocks over the past decades. Nevertheless, we show that penny stocks bought by institutional investors significantly underperform other penny stocks in subsequent four quarters. This poor performance is mainly driven by quasi-indexers, i.e., institutions with passive and widely diversified investment strategies. In comparison, dedicated institutions, i.e., those with low turnover but large average investments in portfolio firms and a commitment to “relationship investing”, have marginally significant ability in trading penny stocks.

Restrictions imposed on short selling provides incentive for these traders to be better informed, leading to the use of short interest data as an information measure. We add to the literature on whether short sellers are, indeed, better informed traders by investigating whether there are changes in short interest near-term to extreme earnings surprises. If short sellers are better informed (or better able to anticipate corporate events), short interest data should reflect noticeable changes in advance of these significant announcements. After controlling for company-specific factors, we find only limited evidence that the average short seller trades with superior information.