Institutional Investment Constraints and Stock Prices

Bing Han and Winghai Wang
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Winghai Wang: U of Wisconsin, Milwaukee

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Institution investors face investment constraints that may limit their ability to fully utilize their information. Consistent with this idea, we find that institutions buy significantly less of the stocks that they already overweight, even when they have positive information about the stocks. They refrain from selling the stocks that they already underweight, even when they receive negative signals. Such demand distortion may lead to price underreaction to news and cross-sectional return predictability: Stocks with good news that institutions overweight are undervalued and subsequently have abnormal high returns; stocks with bad news that institutions underweight are overvalued and have abnormal low subsequent returns. Our tests strongly support this hypothesis. We find that stocks with higher institutional investment constraints have stronger price momentum and larger post earnings announcement drift.

Date: 2005-07
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Journal Article: Institutional Investment Constraints and Stock Prices (2017)
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