Institutional Investors and Equity Prices

Paul A. Gompers, Andrew Metrick

The Quarterly Journal of Economics · 2001 · 1.7K citations · 17 references

TL;DR

The study examines how institutional investors’ stock preferences and their growing market share influence the relative prices and returns of large versus small stocks. Large institutions, whose market share nearly doubled from 1980 to 1996, tend to hold larger, more liquid, higher book‑to‑market stocks with lower recent returns, and the authors confirm these patterns in‑sample and predict future returns out‑of‑sample.

Abstract

We analyze institutional investors' preferences for stocks and the implications that these preferences have for stock-market prices and returns. We find that -- a category including all managers with greater than $100 million under discretionary control -- have nearly doubled their share of the common-stock market from 1980 to 1996 most of this increase driven by the growth in holdings of the largest one-hundred institutions. Large institutions, when compared with other investors, prefer stocks that have greater market capitalizations, are more liquid, and have higher book-to-market ratios and lower returns for the previous year. We discuss how institutional preferences, when combined with the rising share of the market held by institutions, induce changes in the relative prices and returns of large stocks and small stocks. We provide evidence to support the in-sample implications for prices and realized returns and we derive out-of-sample predictions for expected returns.

References

17