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Institutional Investment Constraints and Stock Prices

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Author Info
Han, Bing (Ohio State U)
Wang, Winghai (U of Wisconsin, Milwaukee)
Abstract

Institution investors face investment constraints that may limit their ability to fully utilize their information. Consistent with this idea, we find that institutions buy significantly less of the stocks that they already overweight, even when they have positive information about the stocks. They refrain from selling the stocks that they already underweight, even when they receive negative signals. Such demand distortion may lead to price underreaction to news and cross-sectional return predictability: Stocks with good news that institutions overweight are undervalued and subsequently have abnormal high returns; stocks with bad news that institutions underweight are overvalued and have abnormal low subsequent returns. Our tests strongly support this hypothesis. We find that stocks with higher institutional investment constraints have stronger price momentum and larger post earnings announcement drift.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2004-24.

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Date of creation: Jul 2005
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Handle: RePEc:ecl:ohidic:2004-24

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  1. Yaniv Grinstein & Roni Michaely, 2005. "Institutional Holdings and Payout Policy," Journal of Finance, American Finance Association, vol. 60(3), pages 1389-1426, 06. [Downloadable!] (restricted)
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  5. Paul A. Gompers & Andrew Metrick, 2001. "Institutional Investors And Equity Prices," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 229-259, February. [Downloadable!] (restricted)
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  6. James A. Bennett, 2003. "Greener Pastures and the Impact of Dynamic Institutional Preferences," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 16(4), pages 1203-1238. [Downloadable!] (restricted)
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  11. Del Guercio, Diane, 1996. "The distorting effect of the prudent-man laws on institutional equity investments," Journal of Financial Economics, Elsevier, vol. 40(1), pages 31-62, January. [Downloadable!] (restricted)
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  18. Michael Brennan, 1993. "Agency and Asset Pricing," University of California at Los Angeles, Anderson Graduate School of Management 1147, Anderson Graduate School of Management, UCLA. [Downloadable!]
  19. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March. [Downloadable!] (restricted)
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  21. Hui Ou-Yang, 2005. "An Equilibrium Model of Asset Pricing and Moral Hazard," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 18(4), pages 1253-1303. [Downloadable!] (restricted)
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