Trader Composition and the Cross-Section of Stock Returns

53 Pages Posted: 4 Mar 2008

See all articles by Tao Shu

Tao Shu

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Date Written: March 1, 2008

Abstract

This paper analyzes the impact of trader composition - i.e., the fraction of total trading volume of a stock accounted for by institutional trading - on the cross-section of stock returns. During 1980-2005, trader composition is significantly different from institutional ownership, a quantity of shareholder composition that has received much more attention in the current literature. We find that trader composition has significant effects on stock returns beyond institutional ownership. Specifically, major stock market anomalies, such as return momentum, post earnings-announcement drift, value premium, and investment effect are much stronger in stocks with lower fraction of institutional trading volume. Furthermore, stocks with lower institutional volume underperform stocks with higher institutional volume by 0.25% to 0.53% per month depending on different return adjustments. These findings suggest a positive relationship between fraction of institutional trading volume and stock price efficiency.

Keywords: Institutions, Volume, Anomaly, Price Efficiency

JEL Classification: G14, G20

Suggested Citation

Shu, Tao, Trader Composition and the Cross-Section of Stock Returns (March 1, 2008). EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1100785 or http://dx.doi.org/10.2139/ssrn.1100785

Tao Shu (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Finance Institute ( email )

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