Institutional Investment Constraints and Stock Prices

60 Pages Posted: 8 Dec 2004 Last revised: 27 Aug 2015

Jie Cao

Chinese University of Hong Kong - Department of Finance

Bing Han

University of Toronto, Rotman School of Management

Qinghai Wang

University of Central Florida - College of Business Administration

Date Written: August 2015

Abstract

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

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

Jie Cao

Chinese University of Hong Kong - Department of Finance ( email )

Room 1242 CYT Building
Shatin, NT
Hong Kong
(852) 3943 7757 (Phone)
(852) 2603 6586 (Fax)

HOME PAGE: http://https://sites.google.com/site/jiejaycao/

Bing Han (Contact Author)

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Qinghai Wang

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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