Dice Center Working Paper No. 2004-24
60 Pages Posted: 8 Dec 2004 Last revised: 27 Aug 2015
Date Written: August 2015
We test the hypothesis that investment constraints in delegated portfolio management may distort demand for stocks, leading to price underreaction to news and stock return predictability. We find that institutions tend not to buy more of a stock with good news that they already overweight; they are reluctant to sell a stock with bad news that they already underweight. Stocks with good news overweighted by institutions subsequently outperform significantly stocks with bad news underweighted by institutions. The impact of institutional investment constraints shed new lights on asset pricing anomalies such as stock price momentum and post earnings announcement drift.
Keywords: Institutional investors, investment constraints, market efficiency, momentum, tracking-error constraints, relative performance evaluation
JEL Classification: G2, G12, G14
Suggested Citation: Suggested Citation
Cao, Jie and Han, Bing and Wang, Qinghai, Institutional Investment Constraints and Stock Prices (August 2015). Dice Center Working Paper No. 2004-24; Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=628683 or http://dx.doi.org/10.2139/ssrn.628683