Portfolio Similarity: Institutional Ownership and Asset Prices

Abstract

We examine how expertise of institutional investors (aka deft investors), based on the product market similarity of their 13F holdings, is related to asset prices. We find that portfolio similarity of investors is associated with returns both at the extensive and intensive margins. A long-short strategy that buys (sells) stocks with increases (decreases) in deft ownership earns high risk-adjusted returns. Exploring mechanisms, we find stocks that are traded by deft investors, on average, receive lower investor attention and are relatively under-valued. Our findings suggest that investors specialize in industries and enjoy an information advantage, which when not fully exploited due to investor constraints, allow stock return predictability.

Keywords: Institutional Investors, Product Market Similarity, Price discovery, Information Asymmetry

JEL Classification: G11, G12, G14, G23