Institutional Investor Participation and Stock Market Anomalies

Abstract

This paper investigates the impact of institutional trading volume on stock market anomalies. I construct a measure that evaluates the percentage of total trading volume of a stock accounted for by institutional trades. Using a large sample of firms from 1980–2005, I find strong evidence that the strength of stock market anomalies such as price momentum, post-earnings announcement drift, the value premium, and the investment anomaly is decreasing in institutional trading volume. Additionally, the effects of institutional trading volume are stronger than those of institutional ownership, the major measure of institutional investor participation in the finance literature. These findings suggest that institutional trading significantly improves stock price efficiency.

Keywords: Institutional Trading Volume, Anomalies, Price Efficiency

JEL Classification: G12, G14, G20