Institutional investors and stock return anomalies

Edelen, Roger M.; Ince, Ozgur; Kadlec, Gregory B.

doi:10.1016/j.jfineco.2016.01.002

Cited by 252 publications

(47 citation statements)

References 53 publications

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“…Thus, our evidence conflicts with the finding that institutional investors play an important role in dissolving mispricing by conducting arbitrage trading based on their information and skills [8,20,21]. Rather, our evidence shows that institutional trading destabilizes stock prices rather than corrects mispricing, consistent with recent studies including Lewellen [14] and Edelen et al [15]. We thus contribute to the literature by offering empirical evidence about the role of institutional investors in Korea through an out-of-sample study.…”

Section: Introductioncontrasting

confidence: 76%

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Institutional Investors’ Trading Response to Stock Market Anomalies: Evidence from Korea

Kim

Park

2020

Sustainability

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This study examines whether institutions are sophisticated investors that exploit stock characteristics known to predict future returns in Korea, using data from 2000 to 2018. We analyze the institutional demand, measured as a change in institutional ownership, for stocks with eight well-known anomalies as well as the future abnormal returns of institutional trading. We find that, generally, institutions do not trade consistently with stock anomaly predictions because they are reluctant to hold both highly overvalued and highly undervalued stocks. Although they use a few anomalies, they use these characteristics passively to avoid stocks known to underperform rather than to pick stocks known to outperform. Furthermore, the positive returns on long-legs are concentrated on stocks sold by institutions, while the negative returns on short-legs are concentrated on stocks bought by them. Our finding casts doubt on the widely-accepted notion that institutions are skilled investors and that institutional arbitrage trading corrects any mispricing in the market. To the contrary, institutions’ loss-averse trading behaviors cause or magnify mispricing.

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Section: Introductioncontrasting

confidence: 76%

“…Lewellen [14] argued that institutional investors use anomalies to hold a market portfolio rather than gaining a return on investment. Edelen et al [15] also insisted that institutional investors do not use anomalies but rather buy short-leg overvalued stocks and sell long-leg undervalued stocks, contrary to the anomaly hypothesis.…”

Section: Introductionmentioning

confidence: 99%

Institutional Investors’ Trading Response to Stock Market Anomalies: Evidence from Korea

Kim

Park

2020

Sustainability

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“…DeVault, Sias, and Starks (2014) argue that institutional investors are the sentiment traders whose demand shocks drive prices from fundamental value. Edelen, Ince, and Kadlec (2014) document that institutions are on the wrong side of anomalies more often than not. Goldman and Slezak (2003) show that delegated portfolio management may distort managers' incentive to trade on long-term information and cause stock mispricing.…”

Section: Discussionmentioning

confidence: 99%

Institutional Investment Constraints and Stock Prices

Cao¹,

Han²,

Wang³

2017

J. Financ. Quant. Anal.

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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 significantly outperform stocks with bad news underweighted by institutions. The impact of institutional investment constraints sheds new light on asset pricing anomalies such as stock price momentum and post-earnings announcement drift.

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“…Although small firms within an industry outperform large firms in all subsequent holding periods regardless of their herding levels (confirming the size effect), we find that small firms with high degree of herding significantly underperform small firms that experience low herding, suggesting that the herding effect on returns is a small-firm phenomenon. Considering the argument by Edelen, Ince, and Kadlec (2016) that institutions tend to buy stocks classified as overvalued, eventually leading to negative abnormal returns, our findings suggest that institutional herding particularly focused on small firms may be driving the herding and size effect interaction.…”

Section: Introductionmentioning

confidence: 71%

Do firm characteristics matter in explaining the herding effect on returns?

Demirer

Zhang

2018

Rev Financ Econ

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This paper explores whether firm characteristics matter in determining the effect of investor herding on asset returns. We find that the level of herding alone does not command a significant effect on industry returns, implied by insignificant return spreads between industries that experience high and low degrees of herding. On the other hand, we observe that herding has a significant interaction with size and past returns. We find that small firms with high level of herding significantly underperform small firms that experience low herding. Similarly, past loser industries with high level of herding significantly outperform loser industries with low herding. No significant interactions between book‐to‐market and market beta with herding are observed. Overall, the findings suggest that the herding effect presents itself via size and momentum channels with significant investment implications.

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Institutional investors and stock return anomalies

Cited by 252 publications

References 53 publications

Institutional Investors’ Trading Response to Stock Market Anomalies: Evidence from Korea

Institutional Investors’ Trading Response to Stock Market Anomalies: Evidence from Korea

Institutional Investment Constraints and Stock Prices

Do firm characteristics matter in explaining the herding effect on returns?

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