Style Concentration in Ownership and Expected Stock Returns

Abstract

We examine the relation of expected stock returns with fund style concentration in stock ownership over the period 1997-2015. Concentration is measured by the Herfindahl index H of the shares of different investment styles in the ownership of stocks and represents a measure of investor inattention in stocks. Decile portfolios on H reveal a strong positive association of H with future returns, with the long-short portfolio on H having significant alphas after passing through the five-factor Fama-French (2015) model.

The econometric results confirm the positive association and are robust to the inclusion of known risk-factors as determinants of expected stock returns, the returns of the investment styles themselves, plus a set of style-related control variables and other liquidity, size, or volatility characteristics of stocks. The relation coexists with short-run price and style momentum and long-run style and price reversals of Barberis and Shleifer (2003) and remains present over multi-year horizons of stock returns, being both economically and statistically significant.

The results are consistent with the model of Merton (1987), which claims a stock’s excess risk premium over the CAPM premium, is the product of investor participation (which is proxied by H in our framework), idiosyncratic volatility and size. These results also shed light on the small firm effect.

Keywords: Asset pricing, Style Investing, Stock Ownership Concentration, Institutional Investors, Multi-period Expected Stock Returns, Size Effect

JEL Classification: G12, G23, G4