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Institutional Ownership, Analyst Following and Share Prices

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  • Fernando, Chitru S.

    (University of OK)

  • Gatchev, Vladimir A.

    (University of Central FL)

  • Spindt, Paul A.

    (Tulane University)

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    Abstract

    We develop and test a theory to explain the variation in institutional ownership, analyst following and share price levels across firms. In addition to analysts that generate information about firms, our model incorporates the possibility that institutions can monitor the firms they own and enhance the quality of information that analysts generate about these firms. We show that a firm's institutional ownership and preferred share price level increase with the extent to which institutional investors are able to positively affect it, in contrast to the causal relation between price and institutional ownership that is widely asserted in the literature. Our empirical tests confirm the negative relation between institutional ownership and analyst following predicted by our theory, and we also find that the positive association between preferred share prices (measured by split prices) and institutional ownership persists even after controlling for liquidity and size differences. Our study reconciles the inherent conflict between (a) the argument that lowering stock prices through splits will promote information generation by analysts and (b) the well-documented finding that institutions prefer higher priced stocks.

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    File URL: http://fic.wharton.upenn.edu/fic/papers/10/10-07.pdf
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    Bibliographic Info

    Paper provided by University of Pennsylvania, Wharton School, Weiss Center in its series Working Papers with number 10-07.

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    Date of creation: Feb 2010
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    Handle: RePEc:ecl:upafin:10-07

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    6. Michael Goldstein & Paul Irvine & Eugene Kandel & Zvi Wiener, 2004. "Brokerage Commissions and Institutional Trading Patterns," Discussion Paper Series dp356, The Center for the Study of Rationality, Hebrew University, Jerusalem.
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    Cited by:
    1. Jiang, Christine X. & Kim, Jang-Chul & Zhou, Dan, 2011. "Liquidity, analysts, and institutional ownership," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 335-344.

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