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How Are Large Institutions Different from Other Investors? Why Do These Differences Matter?

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  • Paul A. Gompers
  • Andrew Metrick

Abstract

In this paper, we analyze how large institutions differ from other investors and the implications that these differences have for stock returns, market liquidity, and corporate governance. We find that large institutional investors -- a category including all managers with greater than $100 million in discretionary control -- have nearly doubled their share of the common-stock market over the 1980 to 1996 period, with this increase driven primarily by the largest one-hundred institutions. We show that large institutions, when compared with other investors, prefer stocks that are larger, more liquid, and have higher book-to-market ratios and lower returns for the previous year. Furthermore, the concentration of ownership, measured by the fraction of individual firms' equity held by their five largest institutional blocks, has also increased rapidly over the sample period. We discuss how institutional preferences, when combined with the rising share of the market held by institutions, induces changes in the cross-section of stock returns. We provide evidence to support the in-sample implications for realized returns and derive out-of-sample predictions for expected returns. We also show how rising institutional ownership and concentration has contributed to higher liquidity in public markets and the increased frequency of large-shareholder activism and we discuss the relevance of these findings for theoretical models of large shareholding in corporate governance.

Suggested Citation

  • Paul A. Gompers & Andrew Metrick, 1998. "How Are Large Institutions Different from Other Investors? Why Do These Differences Matter?," Harvard Institute of Economic Research Working Papers 1830, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:1830
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    Cited by:

    1. Yao, Yi & Yang, Rong & Liu, Zhiyuan & Hasan, Iftekhar, 2013. "Government intervention and institutional trading strategy: Evidence from a transition country," Global Finance Journal, Elsevier, vol. 24(1), pages 44-68.
    2. Massimo Massa & William Goetzmann, 2001. "Heterogeneity of Trade and Stock Returns. Evidence from Index Fund Investors," Yale School of Management Working Papers ysm176, Yale School of Management, revised 01 Nov 2001.
    3. John M.R. Chalmers & Roger M. Edelen & Gregory B. Kadlec, "undated". "Mutual fund trading costs," Rodney L. White Center for Financial Research Working Papers 27-99, Wharton School Rodney L. White Center for Financial Research.
    4. Gompers, Paul & Lerner, Josh, 1999. "Conflict of Interest in the Issuance of Public Securities: Evidence from Venture Capital," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 1-28, April.
    5. Goetzmann, William N. & Massa, Massimo, 2002. "Daily Momentum and Contrarian Behavior of Index Fund Investors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(03), pages 375-389, September.
    6. John M.R. Chalmers & Roger M. Edelen & Gregory B. Kadlec, 1999. "Transaction-cost Expenditures and the Relative Performance of Mutual Funds," Center for Financial Institutions Working Papers 00-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
    7. David Ling & Milena Petrova, 2011. "Why Do REITs Go Private? Differences in Target Characteristics, Acquirer Motivations, and Wealth Effects in Public and Private Acquisitions," The Journal of Real Estate Finance and Economics, Springer, vol. 43(1), pages 99-129, July.
    8. Carlos Alves & Victor Mendes, 2004. "Self-Interest on Mutual Fund Management: Evidence from the Portuguese Market," FEP Working Papers 162, Universidade do Porto, Faculdade de Economia do Porto.
    9. Boudriga, Abdelkader & Ben Slama, Sarra & Boulila, Neila, 2009. "What determines IPO underpricing ? Evidence from a frontier market," MPRA Paper 18069, University Library of Munich, Germany.
    10. Richard Chung & Scott Fung & James Shilling & Tammie Simmons-Mosley, 2011. "What Determines Stock Price Synchronicity in REITs?," The Journal of Real Estate Finance and Economics, Springer, vol. 43(1), pages 73-98, July.
    11. Massimo Massa & William Goetzmann, 2001. "Dispersion of Opinion and Stock Returns: Evidence from Index Fund Investors," Yale School of Management Working Papers ysm227, Yale School of Management, revised 01 May 2003.

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