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When Some Investors Head for the Exit

40 Pages Posted: 20 Nov 2011 Last revised: 15 Mar 2012

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Wenxi Jiang

CUHK Business School, The Chinese University of Hong Kong

Date Written: November 19, 2011

Abstract

We develop a measure of binding short-sales constraints in equity markets derived from Chen, Hong, and Stein (2002)'s breadth of mutual fund ownership. We show that when the exit rate, the fraction of investors that held a stock in the previous quarter and that exit that stock this quarter, is high, short-sales constraints are more tightly binding and price is high relative to fundamentals. In contrast, entry of investors that have not previously owned the stock is associated with more not less over-pricing. The exit rate better captures the disagreement distribution of investors in similar fund styles actively evaluating a stock. Using equity funds and for the fi rst time hedge funds, we show that stocks with high exit rates consistently under-perform the market throughout the entire 1980-2008 sample.

Suggested Citation

Hong, Harrison G. and Jiang, Wenxi, When Some Investors Head for the Exit (November 19, 2011). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1962063 or http://dx.doi.org/10.2139/ssrn.1962063

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Wenxi Jiang

CUHK Business School, The Chinese University of Hong Kong ( email )

Room 1250, Cheng Yu Tung Building
Chinese University of Hong Kong
Shatin, NT 06520
Hong Kong

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