Although institutional investors have a preference for large capitalization stocks, over time they have shifted their preferences toward smaller, riskier securities. These changes in aggregate preferences have arisen primarily from changes in the preferences of each class of institution, rather than changes in the importance of different classes. Evidence also suggests that recent growth in institutional investment combined with this shift in preferences helps explain why markets in general, and smaller stocks in particular, have exhibited greater firm-specific risk and liquidity in recent years. Additional analyses suggest that institutional investors moved toward smaller securities because such securities offer “greener pastures.”

We investigate whether institutional investors “vote with their feet” when dissatisfied with a firm's management by examining changes in equity ownership around forced CEO turnover. We find that aggregate institutional ownership and the number of institutional investors decline in the year prior to forced CEO turnover. However, selling by institutions is far from universal. Overall, there is an increase in shareholdings of individual investors and a decrease in holdings of institutional investors who are more concerned with holding prudent securities, are better informed, or are engaged in momentum trading. Measures of institutional ownership changes are negatively related to the likelihoods of forced CEO turnover and that an executive from outside the firm is appointed CEO.