Institutional Investors, Households, and the Time-Variation in Expected Stock Returns

Rüdiger Weber

Journal of Financial and Quantitative Analysis, 2023, vol. 58, issue 1, 352-391

Abstract: I document a new stylized fact: The higher the degree of institutional ownership (IO) in a portfolio, the more time-varying expected returns rather than changes in expected cash flows drive changes in its valuation. Empirical evidence suggests that institutions’ time-varying sensitivity to the risk of holding stocks translates into time-varying expected returns on high-IO stocks. In my model, imperfect risk sharing between different types of investors generates cross-sectional differences in return predictability based on ownership, even among a priori identical stocks. My findings suggest an economic rationale for weak return predictability of small stocks and predictability reversals of stocks and real estate investment trusts.

Date: 2023
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