Sources of Institutional Performance

64 Pages Posted: 13 May 2008

See all articles by Boris Kovtunenko

Boris Kovtunenko

Acadian Asset Management; Blue Fir Capital

Nathan Sosner

AQR Capital Management, LLC

Date Written: April 2004

Abstract

An emerging body of empirical literature finds that institutions as a group are better investors than an average market participant. One part of the literature finds that institutions as a group outperform their benchmarks, before costs. This paper shows that outperformance of the aggregate institutional portfolio found in the previous literature can be explained by institutional preferences for stocks with high accounting profitability. In particular, risk-adjusted excess return on the institutional portfolio over the rest of the market during the 1982-2001 period can be explained by the fact that institutions avoided small stocks with low accounting profitability and overweighted large stocks with high accounting profitability. We do not find any evidence that this preference for accounting profitability is related to price momentum. The other part of the literature finds that fraction of institutional ownership positively predicts future stock returns in a crosssectional regression. We reconcile these findings with our portfolio results by showing that the fraction of institutional ownership is not a statistically significant predictor of firm-level stock returns once we take into account book-to-market, return on equity, size, and biases caused by high positive correlation between the fraction of institutional ownership and stock size.

Keywords: financial institutions, performance evaluation, return on equity, expected returns

JEL Classification: G14, G20

Suggested Citation

Kovtunenko, Boris and Sosner, Nathan, Sources of Institutional Performance (April 2004). Available at SSRN: https://ssrn.com/abstract=1132765 or http://dx.doi.org/10.2139/ssrn.1132765

Boris Kovtunenko (Contact Author)

Acadian Asset Management ( email )

260 Franklin Street
Boston, MA 02110
United States

HOME PAGE: http://www.acadian-asset.com

Blue Fir Capital ( email )

115 River Road
Suite 304
Edgewater, NJ 07020
United States

Nathan Sosner

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

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