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Institutional ownership and return predictability across economically unrelated stocks

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  • Gao, George P.
  • Moulton, Pamela C.
  • Ng, David T.

Abstract

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.

Suggested Citation

  • Gao, George P. & Moulton, Pamela C. & Ng, David T., 2017. "Institutional ownership and return predictability across economically unrelated stocks," Journal of Financial Intermediation, Elsevier, vol. 31(C), pages 45-63.
    • Handle: RePEc:eee:jfinin:v:31:y:2017:i:c:p:45-63
    DOI: 10.1016/j.jfi.2016.07.004
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    Cited by:

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    4. Yi, Biao & Guo, Shuxin, 2022. "Common analyst links and predictable returns: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    5. Gilje, Erik P. & Gormley, Todd A. & Levit, Doron, 2020. "Who's paying attention? Measuring common ownership and its impact on managerial incentives," Journal of Financial Economics, Elsevier, vol. 137(1), pages 152-178.
    6. Chen, Zilin & Chu, Liya & Liang, Dawei & Tu, Jun, 2022. "Far away from home: Investors’ underreaction to geographically dispersed information," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).
    7. Bestari Dwi Handayani & Abdul Rohman & Anis Chariri & Imang Dapit Pamungkas, 2020. "Corporate Financial Performance on Corporate Governance Mechanism and Corporate Value - Evidence from Indonesia," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 16(3), pages 161-171.
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    More about this item

    Keywords

    Return predictability; Anomalies; Institutional ownership; Institutional trading;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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