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Institutional Investments in Pure Play Stocks and Implications for Hedging Decisions

Author

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  • Minton, Bernadette A.

    (OH State University)

  • Schrand, Catherine M.

    (University of PA)

Abstract

We show that institutions invest in stocks within an industry that maintain exposure to their underlying industry risk factor. These "pure play" stocks have greater numbers of institutional investors and institutions systematically overweight them in their portfolios while underweighting low industry-exposure stocks of firms in the same nominal industry. Pure play stocks also have greater liquidity measured by stock turnover and price impact. An implication of these results is that catering to these preferences could be an important variable in firms' risk management decisions, potentially offsetting incentives to reduce volatility via hedging. We further characterize institutions' investments for pure play stocks across institution type, industries, and over time.

Suggested Citation

  • Minton, Bernadette A. & Schrand, Catherine M., 2016. "Institutional Investments in Pure Play Stocks and Implications for Hedging Decisions," Working Paper Series 2016-3, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2016-3
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    Cited by:

    1. Jordan, Bradford D. & Li, Ang & Liu, Mark H., 2022. "Mutual fund preference for pure-play firms," Journal of Financial Markets, Elsevier, vol. 61(C).
    2. Jason V. Chen & Venky Nagar & Jordan Schoenfeld, 2018. "Manager-analyst conversations in earnings conference calls," Review of Accounting Studies, Springer, vol. 23(4), pages 1315-1354, December.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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