Idiosyncratic Volatility, Institutional Ownership, and Investment Horizon
European Financial Management, Forthcoming
54 Pages Posted: 13 Oct 2012 Last revised: 9 Aug 2014
Date Written: July 18, 2013
This paper reevaluates the cross-sectional effect of institutional ownership on idiosyncratic volatility by conditioning on institutions’ investment horizon. Prior literature establishes a positive link between growing institutional ownership and idiosyncratic volatility. However, this effect may vary depending on the type of institutional ownership. We document that short-term (long-term) institutional ownership is positively (negatively) linked to idiosyncratic volatility in the cross section. These opposite effects persist after controlling for institutional preferences and information-based trading and remain qualitatively unchanged after controlling for endogeneity. This suggests that short-term (long-term) institutions exhibit higher (lower) trading activity, which increases (decreases) idiosyncratic volatility.
Keywords: institutional investors, idiosyncratic volatility, investment horizon, trading preferences.
JEL Classification: G12, G23
Suggested Citation: Suggested Citation