Short-Term Institutions’ Information Advantage and Overvaluation
The North American Journal of Economics and Finance, 101299
29 Pages Posted: 25 Jan 2021
Date Written: October 2020
Prior literature has documented that institutions which trade more frequently are better able to forecast future returns and have an informational advantage. This study examines a proximate explanation for the differences in performance based on institutions’ investment horizon – short-term institutions are better informed because they are better able to identify overvalued stocks that are short-sale constrained and overvalued in the context of Miller’s (1977) overvaluation hypothesis. Analysis is conducted on 6,330 unique firms from 1996 to 2014 using the calendar-time portfolio approach where abnormal returns are estimated from the Fama-French-Carhart four-factor regression model. The results provide evidence that stocks which are extremely overvalued due to short-sale constraints have the greatest decline in short-term institutional ownership, consistent with the notion that short-term institutions are able to correctly assess the components for stock overvaluation.
Keywords: Short Interest; Institutional Ownership; Short-Sale Constraints
JEL Classification: G12; G14; G20
Suggested Citation: Suggested Citation