Which Investors Matter for Equity Valuations and Expected Returns?

76 Pages Posted: 28 Jun 2019 Last revised: 29 Jul 2022

See all articles by Ralph S. J. Koijen

Ralph S. J. Koijen

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Robert Richmond

New York University (NYU) - Department of Finance

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Multiple version iconThere are 3 versions of this paper

Date Written: AugustJuly 28, 2022

Abstract

We develop and estimate a characteristics-based demand system for financial assets to quantify the impact of changes in demand of various investors on asset prices and investors’ wealth. We apply the model to understand the impact of the market trend from active to passive investing on asset prices and price informativeness. We find that there is a nontrivial impact on valuations, yet a small impact on price informa- tiveness. To understand the mechanism, we develop a new investor-level measure of price informativeness and show that there is no systematic relation between changes in institutional flows from active to passive managers and and how informed investors are about future fundamentals. We also explore the impact of a shift in demand for green firms, either for a subset of investors as a result of climate-related regulations or for a broad group of institutional investors due to overall increased awareness. This shift in demand benefits long-term investors such as pension funds and insurance companies, banks, and passive investment advisors at the expense of hedge funds and small-active investment advisors.

Suggested Citation

Koijen, Ralph S. J. and Richmond, Robert and Yogo, Motohiro, Which Investors Matter for Equity Valuations and Expected Returns? (AugustJuly 28, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-92, NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3378340 or http://dx.doi.org/10.2139/ssrn.3378340

Ralph S. J. Koijen (Contact Author)

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/ralph.koijen/

Centre for Economic Policy Research (CEPR) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Robert Richmond

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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Motohiro Yogo

Princeton University - Department of Economics ( email )

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Princeton, NJ 08544
United States

HOME PAGE: http://sites.google.com/site/motohiroyogo/

National Bureau of Economic Research

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