Institutional Investors and Equity Prices

Paul Gompers and Andrew Metrick

No 6723, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze institutional investors' preferences for stocks and the implications that these preferences have for stock-market prices and returns. We find that -- a category including all managers with greater than $100 million under discretionary control -- have nearly doubled their share of the common-stock market from 1980 to 1996 most of this increase driven by the growth in holdings of the largest one-hundred institutions. Large institutions, when compared with other investors, prefer stocks that have greater market capitalizations, are more liquid, and have higher book-to-market ratios and lower returns for the previous year. We discuss how institutional preferences, when combined with the rising share of the market held by institutions, induce changes in the relative prices and returns of large stocks and small stocks. We provide evidence to support the in-sample implications for prices and realized returns and we derive out-of-sample predictions for expected returns.

JEL-codes: G12 G20 (search for similar items in EconPapers)
Date: 1998-09
New Economics Papers: this item is included in nep-fmk
Note: CF AP
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Citations: View citations in EconPapers (23)

Published as Quarterly Journal of Economics (February 2001).

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