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Institutional Ownership, Analyst Following and Share Prices

Author

Listed:
  • Fernando, Chitru S.

    (University of OK)

  • Gatchev, Vladimir A.

    (University of Central FL)

  • Spindt, Paul A.

    (Tulane University)

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.

Suggested Citation

  • Fernando, Chitru S. & Gatchev, Vladimir A. & Spindt, Paul A., 2010. "Institutional Ownership, Analyst Following and Share Prices," Working Papers 10-07, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:10-07
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    File URL: http://fic.wharton.upenn.edu/fic/papers/10/10-07.pdf
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    References listed on IDEAS

    as
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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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    More about this item

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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