Short sales,institutional investors and the cross-section of stock returns

Short-sale constraints are most likely to bind among stocks with low institutional ownership. Because of institutional constraints, most professional investors simply never sell short and hence cannot trade against overpricing of stocks they do not own. Furthermore, stock loan supply tends to be sparse and short selling more expensive when institutional ownership is low. Using institutional ownership as a proxy, I find that short-sale constraints help explain cross-sectional stock return anomalies. Specifically, holding size fixed, the under-performance of stocks with high market-to-book, analyst forecast dispersion, turnover, or volatility is most pronounced among stocks with low institutional ownership. Ownership by passive investors with large stock lending programs partly mitigates this under-performance, indicating some impact of stock loan supply. Prices of stocks with low institutional ownership also underreact to bad cash-flow news and overreact to good cash-flow news, consistent with the idea that short-sale constraints hold negative opinions off the market for these stocks.     

Institutional ownership and return predictability across economically unrelated stocks

We document strong weekly lead-lag return predictability across stocks from different industries with no customer-supplier linkages (economically unrelated stocks). Between 1980 and 2010, the industry-neutral long-short hedge portfolio earns an average of over 19 basis points per week. This predictability is related to common institutional ownership and is distinct from previously documented lead-lag effects. Common institutional ownership is a complementary rather than a substitute explanation for return predictability. Information linkages are enough to induce return predictability among stocks in the same industry, but economically unrelated stocks exhibit return predictability only when they have common institutional owners. Our findings suggest that institutional portfolio reallocations can induce return predictability among otherwise unrelated stocks.     

Institutional ownership,volatility and dividends

We find that the sign of the correlation between institutional ownership and volatility depends on the firm’s dividend policy: institutional ownership is negatively (positively) related to volatility among non-dividend (dividend) paying stocks. The empirical results are consistent with an interaction between institutional preference for low volatility and the tendency of higher levels of institutional ownership to increase volatility through their trading behavior. This result is robust to many control variables and possible endogeneity concerns. Supporting our conjecture that institutions herd on dividend signals we find that the correlation between turnover and institutional ownership is higher for dividend paying stocks, and that the positive correlation between turnover and institutional ownership is higher on dividend declaration days. Finally, we also find that the level of institutional ownership drops following an increase in volatility for both dividend payers and non-payers, and that volatility rises following increased institutional ownership for dividend paying stocks.     

Who monitors opaque borrowers? Debt specialisation,institutional ownership,and information opacity

In this study, we suggest that the level of information opaqueness determines the propensity of publicly listed firms to have debt financing from only a few debt types (i.e., debt specialisation). Using accruals quality as a proxy for information opaqueness, we find that the degree of debt specialisation is lower for firms with high-quality accruals. This result is consistent with the notion that information collection and monitoring costs are higher for firms that have higher informational opacity, explaining the tendency towards debt specialisation. We further argue that creditors need not monitor borrowers so closely when they are monitored by institutional owners. The empirical findings support this argument and show that firms with more stable institutional ownership are likely to have less specialised debt types. The empirical evidence is also consistent with the expectation that stable institutional ownership is likely to reduce the demand for monitoring over accruals management. Using S&P 500 membership as an exogenous event driving institutional ownership changes, we further document that debt specialisation is decreasing in accruals quality when institutional investors are expected to have an influence.     

Passive Institutional Ownership,R2 Trends,and Price Informativeness

A distinctive trend in the capital markets over the past two decades is the rise in equity ownership of passive financial institutions. We propose that this rise has a negative effect on price informativeness. By not trading around firm‐specific news, passive investors reduce the firm‐specific component of total volatility and increase stock correlations. Consistent with this hypothesis, we find that the growth in passive institutional ownership is robustly associated with the growth in market model R²s of individual stocks since the early 1990s. Additionally, we find a negative relation between passive ownership and earnings predictability, an informativeness proxy.     

Of shepherds, sheep, and the cross-autocorrelations in equity returns

We present an economic mechanism and supportive empirical evidencefor the transmission of information between equity securitiesfirst documented by Lo and MacKinlay (1990). It is argued thatthe past returns on stocks held by informed institutional traderswill be positively correlated with the contemporaneous returnson stocks held by noninstitutional uninformed traders. Evidenceconsistent with this hypothesis is then presented. We documentthat the returns on the portfolio of stocks with the highestlevel of institutional ownership lead the returns of portfoliosof stocks with lower levels of institutional ownership. Thiseffect persists even after firm size is controlled for and isapparent at longer lags than the size-related lag effect documentedin Lo and MacKinlay (1990).     

The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies

We examine the causal effect of limits to arbitrage on 11 well-known asset pricing anomalies using the pilot program of Regulation SHO, which relaxed short-sale constraints for a quasi-random set of pilot stocks, as a natural experiment. We find that the anomalies became weaker on portfolios constructed with pilot stocks during the pilot period. The pilot program reduced the combined anomaly long–short portfolio returns by 72 basis points per month, a difference that survives risk adjustment with standard factor models. The effect comes only from the short legs of the anomaly portfolios.     

Foreign and Local Institutional Ownership and the Speed of Price Adjustment

Abstract:  This paper examines the relation between the speed of price adjustment and stock ownership by foreign and local institutional investors using data from the Korean stock market. We show that returns of stocks with high foreign institutional ownership lead returns of stocks with low foreign institutional ownership, especially after foreign ownership restriction is lifted. Likewise, returns of stocks with high local institutional ownership lead returns of stocks with low local institutional ownership. These results support the idea that foreign institutional (local institutional) investors have faster access to or processing power of new information than local institutional (local individual) investors.     

The Determinants of REIT Institutional Ownership: Tests of the CAPM

This study examines the determinants of institutional investment demand for REIT common stock. We estimate the demand function for financial institutions using the mean return and CAPM risk measures (beta and standard error) for REIT stocks. The objective is to determine whether institutional investment decisions are influenced by CAPM model attributes. In addition, we examine the predicatability of REIT institutional ownership based on the factors in our model. We employ conventional OLS forecasting techniques, as well as two neural network models in order to deal with possible nonlinearities in the relationships.     

Institutional Trade Persistence and Long‐Term Equity Returns

Recent studies show that single‐quarter institutional herding positively predicts short‐term returns. Motivated by the theoretical herding literature, which emphasizes endogenous persistence in decisions over time, we estimate the effect of multiquarter institutional buying and selling on stock returns. Using both regression and portfolio tests, we find that persistent institutional trading negatively predicts long‐term returns: persistently sold stocks outperform persistently bought stocks at long horizons. The negative association between returns and institutional trade persistence is not subsumed by past returns or other stock characteristics, is concentrated among smaller stocks, and is stronger for stocks with higher institutional ownership.     

Individual Investor Trading and Stock Returns

This paper investigates the dynamic relation between net individual investor trading and short‐horizon returns for a large cross‐section of NYSE stocks. The evidence indicates that individuals tend to buy stocks following declines in the previous month and sell following price increases. We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell, which we show is distinct from the previously shown past return or volume effects. The patterns we document are consistent with the notion that risk‐averse individuals provide liquidity to meet institutional demand for immediacy.     

Equity market valuation of human capital and stock returns

We investigate whether and how well firms’ stock market valuations reflect their employees’ collective skills and effectiveness relative to that of their industry peers and competitors. We devise a relative stock market valuation measure of human capital intangibles (EVHC) and find that portfolios of low EVHC firms systematically outperform portfolios of high EVHC firms by an average 1.34% per month. However, this is primarily a small firms effect, because for large firms the excess returns of the arbitrage portfolio that is long on the low EVHC stocks and short on the high EVHC stocks is zero. Our results suggest that reliance on human capital intangibles may proxy for risk not fully accounted for by conventional asset pricing models, or alternatively, that the market cannot correctly price human capital intangibles for small size firms.     

Institutional preferences,demand shocks and the distress anomaly

Our paper examines the distress anomaly on the Chinese stock markets. We show that the anomaly disappears after controlling for institutional ownership. We propose two hypotheses. The growing scale of institutional investors and changes in institutional preferences can generate greater demand shocks for stocks with low distress risk than those with high distress risk, causing the former to outperform the latter. Consistent with our hypotheses, the growth of institutions explains the anomaly when the institutional market share increases rapidly. We also show that institutional preferences for stocks with low distress risk have significantly increased over time and changes in preferences also explain the anomaly. Finally, momentum trading and gradual incorporation of distress information cannot account for the anomaly.     

Short-sale refinancing and price adjustment speed to bad news: Evidence from a quasi-natural experiment in China

Short selling may accelerate stock price adjustment to negative news. However, the literature provides mixed evidence for this prediction. Using short-sale refinancing and a staggered difference-in-differences (DID) model, this paper explores the effect of short selling on stock price adjustment. Our results show that (1) short-sale refinancing improves the speed of stock price adjustment to negative news. This result holds after we control for endogeneity. (2) The positive relationship between short-sale refinancing and stock price adjustment speed is significant in subsamples of stocks with higher earnings management or lower accuracy of analyst forecasts, indicating that firms with more opaque information are more likely to be targeted by short sellers. In subsamples of stocks with a higher ownership concentration or lower ownership by institutional investors, short selling is more likely to increase the speed of stock price adjustment, indicating that ownership structure may influence negative news mining. (3) As short-sale refinancing exacerbates the absorption of bad news by stock prices, it increases crash risk. This study enriches the research on the economic consequences of short selling and provides empirical evidence supporting regulations on short selling in China.     

Reconcilable Differences: Momentum Trading by Institutions

A growing literature evaluates the relation between lag returns and demand by institutional investors. Given that lag returns and institutional ownership are directly observable, it is surprising that previous tests yield dramatically different conclusions. This study examines differences across studies and finds that four factors account for these discrepancies: (1) value‐weighting versus equal‐weighting across stocks, (2) averaging versus aggregating over managers, (3) disagreement in the signs of measures of institutional demand, and (4) correlation between current capitalization and both lag returns and measures of institutional demand. Controlling for these factors, the results across different methods are remarkably uniform.     

机构投资者交易行为特征研究

本文通过研究股票收益变化和机构持股变化之间的关系,发现对于高机构持股股票,过去表现较好的股票会吸引机构增加持仓,且机构增持的股票相对减持的股票的后续表现又更好,而低机构持股股票则不然。这表明机构投资者整体上是采用正反馈即惯性交易策略的,而个体投资者的行为则较为随机。对于缺乏投资经验的个体投资者而言,论文结果意味着他们应当委托机构进行理财如投资于基金。     

TRADING COSTS OF NON‐U.S. STOCKS ON THE NEW YORK STOCK EXCHANGE: THE EFFECT OF INSTITUTIONAL OWNERSHIP,ANALYST FOLLOWING,AND MARKET REGULATION

We investigate the differences in market microstructure between U.S. and non‐U.S. stocks cross‐listed on the New York Stock Exchange using a sample of 316 pairs of matched stocks. We find that non‐U.S. stocks have wider spreads and larger adverse‐selection costs than U.S. stocks even after controlling for macro‐level institutional differences. Regression analysis shows that spreads and adverse‐selection costs are negatively correlated with institutional ownership and analyst followings. Thus, the higher spreads and adverse‐selection costs for non‐U.S. stocks can be partly explained by the lower institutional ownership and analyst following of non‐U.S. stocks. In addition, we find that although the spreads and adverse‐selection costs for non‐U.S. stocks are significantly higher before the implementation of Regulation Fair Disclosure (FD), the differences become even greater after Regulation FD, suggesting that Regulation FD has improved the information environment for U.S. stocks.     

Local institutional investors,information asymmetries,and equity returns

We examine the informational role of geographically proximate institutions in stock markets. We find that both the level of and change in local institutional ownership predict future stock returns, particularly for firms with high information asymmetry; in contrast, such predictive abilities are relatively weak for nonlocal institutional ownership. The local advantage is especially evident for local investment advisors, high local ownership institutions, and high local turnover institutions. We also find that the stocks that local institutional investors hold (trade) earn higher excess returns around future earnings announcements than those that nonlocal institutional investors hold (trade).     

Distribution of Ownership,Short Sale Constraints,and Market Efficiency: Evidence from Cross‐Listed Stocks

We investigate the interplay between the distribution of ownership, short sale constraints, and market efficiency. Using minute‐by‐minute data during the period surrounding the short sale ban of 2008, we demonstrate that short sale restrictions cause price disparities among cross‐listed stocks when ownership in the stocks is distributed unevenly across the two markets. The stocks tend to trade at a premium in the market where long sellers are relatively scarcer, which reduces the speed at which prices adjust to bad news. The premium is driven primarily by an increase on the ask side of the market where ownership is thinner, is only evident when prices are moving down, and disappears quickly.     

A friend in need is a friend indeed: Allocation and demand in IPO bookbuilding

This paper uses proprietary data on European IPOs with detailed information on the demand at different points of time and allocation for institutional and retail investors. The nature of the data allows us to analyze the reason of why institutional investors as a group get more allocations of underpriced issues than retail investors. By explicitly examining institutional and retail demand for different kinds of stocks, we find that this is due to institutional investors' superior ability to detect underpriced stocks rather than the underwriter's preferential treatment. At the same time, the subset of domestic institutional investors supports the underwriter in issues with weak demand and receives in turn favorable allocations in underpriced issues.