Institutional Ownership and the Value Premium

Abstract

Consistent with mispricing explanations proposed in the literature to explain the value premium, the value premium is driven by stocks held by individual investors. Stocks held by institutional investors do not exhibit any significant value premium nor value effect while representing 93% of the market capitalization. In contrast, in stocks most held by individual investors the value premium, even value-weighted, reaches a staggering 2% per month. This shows that the value premium is likely to be due to mispricing and that arbitraging it entails substantive costs.

Note: Previously titled "Institutional Ownership and Valuation Ratios"

Keywords: behavioral finance, book-to-market ratio, institutional ownership

JEL Classification: G12, G14, G20