Institutional Investors and Stock Return Anomalies
48 Pages Posted: 8 Oct 2014 Last revised: 27 May 2015
Date Written: May 18, 2015
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: Suggested Citation