Big Fish in a Small Pond: Institutional Trading of Penny Stocks

Wei Huang () and George J. Jiang
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Wei Huang: Accounting and Finance Department, College of St. Benedict and St. John’s University, Collegeville, MN 56321, USA
George J. Jiang: Gary P. Brinson Chair of Investment Management, Department of Finance and Management Science, College of Business, Washington State University, Pullman, WA 99164, USA

Quarterly Journal of Finance (QJF), 2020, vol. 10, issue 02, 1-31

Abstract: There has been a steady increase in institutional ownership of penny stocks over the past decades. Nevertheless, we show that penny stocks bought by institutional investors significantly underperform other penny stocks in subsequent four quarters. This poor performance is mainly driven by quasi-indexers, i.e., institutions with passive and widely diversified investment strategies. In comparison, dedicated institutions, i.e., those with low turnover but large average investments in portfolio firms and a commitment to “relationship investing”, have marginally significant ability in trading penny stocks.

Keywords: Penny stocks; institutional trading; price impact; abnormal stock returns; short interest (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S2010139220500056

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