Institutional Ownership and Time-Series Predictability of Stock Returns
62 Pages Posted: 27 May 2017 Last revised: 7 Aug 2018
Date Written: August 3, 2018
The higher the share of institutional ownership in a stock, the higher the share of dividend yield variation caused by discount rate variation. For stocks held mostly by individual investors, there is no return predictability. This novel finding helps explain the weak return predictability of small and value stocks, the postwar predictability reversal and the inability of dividend smoothing to exhaustively explain that reversal. More strongly time-varying marginal utility of institutions acting as marginal investors in the respective stocks provides a natural explanation for the observed pattern. In an equilibrium model, time-varying redemption risks generate the observed predictability patterns among a priori identical stocks.
Keywords: predictability, institutional ownership, asset pricing, marginal investor, redemption risk
JEL Classification: G12, G17, G23
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