Big Fish in a Small Pond: Institutional Trading of Penny Stocks
The Quarterly Journal of Finance, Forthcoming
38 Pages Posted: 13 Jan 2020
Date Written: December 02, 2019
There has been a steady increase in institutional ownership of penny stocks over the past decades. Nevertheless, we show that penny stocks bought by institutional investors significantly underperform other penny stocks in subsequent four quarters. This poor performance is mainly driven by quasi-indexers, i.e., institutions with passive and widely diversified investment strategies. In comparison, dedicated institutions, i.e., those with low turnover but large average investments in portfolio firms and a commitment to “relationship investing”, have marginally significant ability in trading penny stocks.
Keywords: Penny Stocks, Institutional Trading, Price Impact, Abnormal Stock Returns, Short Interest
JEL Classification: G10, G12, G14, G23
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