Institutional Ownership, Analyst Following and Share Prices

Chitru S. Fernando, Vladimir A. Gatchev and Paul A. Spindt
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Chitru S. Fernando: University of OK
Vladimir A. Gatchev: University of Central FL
Paul A. Spindt: Tulane University

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: We develop and test a theory to explain the variation in institutional ownership, analyst following and share price levels across firms. In addition to analysts that generate information about firms, our model incorporates the possibility that institutions can monitor the firms they own and enhance the quality of information that analysts generate about these firms. We show that a firm's institutional ownership and preferred share price level increase with the extent to which institutional investors are able to positively affect it, in contrast to the causal relation between price and institutional ownership that is widely asserted in the literature. Our empirical tests confirm the negative relation between institutional ownership and analyst following predicted by our theory, and we also find that the positive association between preferred share prices (measured by split prices) and institutional ownership persists even after controlling for liquidity and size differences. Our study reconciles the inherent conflict between (a) the argument that lowering stock prices through splits will promote information generation by analysts and (b) the well-documented finding that institutions prefer higher priced stocks.

JEL-codes: C24 G12 G30 (search for similar items in EconPapers)
Date: 2010-02
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Citations: View citations in EconPapers (1)

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