Institutional Investors and Stock Market Liquidity: Trends and Relationships

43 Pages Posted: 18 Sep 2012

See all articles by Marshall E. Blume

Marshall E. Blume

University of Pennsylvania - Finance Department

Donald B. Keim

University of Pennsylvania - Wharton School

Date Written: August 21, 2012

Abstract

In this paper we show that institutional participation in the U.S. stock market in recent decades has played an ever increasing role in explaining cross-sectional variation in stock market illiquidity. We first document trends in the growth of institutional stock ownership using the 13F holdings, extending the evidence by thirteen years to the end of 2010. In contrast to previous research, we find that institutions, and particularly hedge funds, have increased their holdings of smaller stocks and decreased their holdings of larger stocks over this period.

Institutions currently underweight the largest stocks and overweight the smallest stocks relative to market weights. We then examine the relation between illiquidity and two measures of institutional stock ownership – the percentage of a stock owned by institutions and the number of institutions that own the stock – both in the cross section and through time. We find that: (1) the number of institutions that own and trade a stock is more important than the percentage of institutional ownership in explaining the cross-sectional variability of illiquidity; and (2) the power of the number of institutional owners in explaining illiquidity is significantly stronger in the second half of our sample period.

Keywords: Institutional investors, Institutional stock ownership, SEC 13F filings, Hedge funds

JEL Classification: G11, G12, G23

Suggested Citation

Blume, Marshall E. and Keim, Donald B., Institutional Investors and Stock Market Liquidity: Trends and Relationships (August 21, 2012). Available at SSRN: https://ssrn.com/abstract=2147757 or http://dx.doi.org/10.2139/ssrn.2147757

Marshall E. Blume

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7616 (Phone)
215-573-8084 (Fax)

Donald B. Keim (Contact Author)

University of Pennsylvania - Wharton School ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7685 (Phone)
215-898-6200 (Fax)

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