Journal of Financial Economics Vol. 119 No. 3 2016
Institutional investors and stock return anomalies
Abstract
We examine institutional demand prior to well-known stock return anomalies and find that institutions have a strong tendency to buy stocks classified as overvalued (short leg of anomaly), and that these stocks have particularly negative ex post abnormal returns. Our results differ from numerous studies documenting a positive relation between institutional demand and future returns. We trace the difference to measurement horizon. We too find a positive relation at a quarterly horizon. However, the relation turns strongly negative at the one-year horizon used in anomaly studies. We consider several explanations for institutions’ tendency to trade contrary to anomaly prescriptions. Our evidence largely rules out explanations based on flow and limits-of-arbitrage, but is more consistent with agency-induced preferences for stock characteristics that relate to poor long-run performance.
- DOI
- 10.1016/j.jfineco.2016.01.002
- Volume
- 119
- Issue
- 3
- Pages
- 472-488
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref