Institutional ownership as an additional factor to describe stock returns

Uğurlu Yıldırım, Ecenur
After the development of asset pricing models, empirical studies have shown that there are inconsistencies between these theoretical models and empirical findings. Due to these inconsistencies, asset-pricing researchers have started to examine a broader set of factors that might affect asset market behavior. As the institutional investors are huge players in the financial markets, and their importance in stock market has increased in last years, it is crucial to understand the impact of institutional investors on stock prices and on the efficiency of the market (Chen et al., 2015). In this paper, we basically hypothesize that, institutional investor variable might be a proxy for some systematic risk factor, such as asymmetric information risk, noise trader risk, or agency problem, that should be incorporated in to the asset-pricing model. 4320 firms listed on NYSE, NASDAQ and AMEX traded between January 1980 and December 2016 with complete data for size, price, book value, market value and institutional ownership are used as a sample for the analysis. Methodology similar to Fama- French (1993) paper is employed. In addition to market, size and book-to-market factors, a new variable, called IMI (institutional minus individual), which is mimicking portfolio for institutional ownership, is included to the Fama-French 3-factor model, and tested whether this new factor has a significant impact on required return of stocks. In the second part, the literature on the relation between one of the most well-known anomalies, momentum, and institutional investors is re-visited. The success of Carhart’s 4-factor model, and the model with Carhart’s 4-factor and IMI, in terms of explaining the returns are investigated. Overall, it can be said that, including IMI to the Carhart’s 4-factor model performs better than all other models that are tested. This model captures the common variations in returns better than Fama-French 3-factor, Carhart’s 4-factor and other models that are examined. Consistent with the literature, the new 5-factor model improves mispricing mostly in portfolios including stocks with low institutional ownership. When we test the empirical relationship between IMI and possible risk factors it proxies to, information asymmetry is found significantly related to IMI. Therefore, it can be concluded that IMI most likely proxies to asymmetric information risk.
Citation Formats
E. Uğurlu Yıldırım, “Institutional ownership as an additional factor to describe stock returns,” Ph.D. - Doctoral Program, Middle East Technical University, 2018.