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Institutional Investment Constraints and Stock Prices

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  • Han, Bing

    (Ohio State U)

  • Wang, Winghai

    (U of Wisconsin, Milwaukee)

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    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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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2004/2004-24.pdf
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    Bibliographic Info

    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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