Institutional Investors, Households and the Time-Variation in Expected Stock Returns
Journal of Financial and Quantitative Analysis, forthcoming
73 Pages Posted: 27 May 2017 Last revised: 7 Feb 2022
Date Written: August 3, 2018
I document a new stylized fact: the higher the degree of institutional ownership (IO) in a portfolio, the more time-varying expected returns rather than changes in expected cash flows drive changes in its valuation. Empirical evidence suggests that institutions’ time-varying sensitivity to the risk of holding stocks translates into time-varying expected returns on high-IO stocks. In my model, imperfect risk sharing between different types of investors generates cross-sectional differences in return predictability based on ownership, even among a-priori identical stocks. My findings suggest an economic rationale for weak return predictability of small stocks and predictability reversals of stocks and REITs.
Keywords: time-series return predictability, households, institutional ownership, financialization, heterogeneous agents
JEL Classification: G12, G17, G23, G50
Suggested Citation: Suggested Citation