Institutional Investors and Stock Return Anomalies

48 Pages Posted: 8 Oct 2014 Last revised: 27 May 2015

See all articles by Roger M. Edelen

Roger M. Edelen

Virginia Tech

Ozgur Ince

University of South Carolina - Moore School of Business

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 18, 2015

Abstract

We examine institutional demand prior to well-known stock return anomalies and find that institutions have a strong tendency to buy stocks classified as overvalued (short leg of anomaly), and that these stocks have particularly negative ex-post abnormal returns. Our results differ from numerous studies documenting a positive relation between institutional demand and future returns. We trace the difference to measurement horizon. We also find a positive relation at a quarterly horizon. However, the relation turns strongly negative at the one-year horizon used in anomaly studies. We consider several explanations for institutions’ tendency to trade contrary to anomaly prescriptions. Our evidence largely rules out explanations based on flow and limits of arbitrage, but is more consistent with agency-induced preferences for stock characteristics that relate to poor long-run performance.

Keywords: Anomalies, Institutional investors, Market efficiency, Investor base, limits of arbitrage

JEL Classification: G12, G14, G23

Suggested Citation

Edelen, Roger M. and Ince, Ozgur S. and Kadlec, Gregory B., Institutional Investors and Stock Return Anomalies (May 18, 2015). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2506683 or http://dx.doi.org/10.2139/ssrn.2506683

Roger M. Edelen

Virginia Tech ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

Ozgur S. Ince (Contact Author)

University of South Carolina - Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States
(803) 777-4905 (Phone)

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States
540-231-4316 (Phone)

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