Liquidity Effects of Institutional Investment Horizons

Abstract

We examine whether institutional investors with different investment horizons exert different influences on a stock’s liquidity effects. Our findings show that stocks increased by short-term institutions become more liquid while stocks increased by long-term institutions become less liquid. Furthermore, short-term institutions pay more attention to changes in a firm’s recent fundamentals than long-term institutions and changes in liquidity effects resulting from holding changes of short-term institutions have more explanation power on stock returns in the next quarter than those resulting from long-term institutions, suggesting short-term institutions are more informed about a firm’s short-term fundamentals than long-term institutions. Finally, we find increased holdings of both short-term and long-term institutions for a stock caused by improvement in a firm’s fundamentals generally make the stock more liquid, suggesting institutional demand provides a channel through which a firm’s fundamentals can influence its stock liquidity.

Keywords: stock liquidity; institutional investors; investment horizon; informed; fundamentals

JEL Classification: G12, G20