The impacts of institutional ownership on stock returns


The relation between institutional investors’ trading persistence and stock returns is still not clear. Despite the fact that previous studies have demonstrated the persistence of institutional trading can be short-term positively correlated with following stock returns, some empirical studies show that this short-term positive relation holds only under particular circumstances. Recently, Dasgupta et al. (J Finance 66:635–653, 2011) have even found that the persistence of institutional trading is associated with reversals in stock returns. To fill the gap in the literature, I use a unique monthly institutional ownership data to present new empirical evidence showing that institutional trading not only has a short-term positive impact on stock returns but can also have a long-term negative effect. Moreover, I find that stocks with the lower accumulated growth of institutional ownership tend to have greater momentum than stocks with higher such growth. A zero-investment strategy of buying stocks with ‘LOW’-decile institutional ownership and selling ‘HIGH’-decile ones can outperform the market and generate significant abnormal returns.

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  1. 1.

    For stocks with high past returns, see Grinblatt et al. (1995); for new institutional positions in a stock, see Badrinath and Wahal (2002); for institutional purchases but not for sales, see Cai and Zheng (2004); and for small and growth stocks, see Yan and Zhang (2009).

  2. 2.

    Although Campbell et al. (2009) use the Trade and Quote database to decompose the quarterly changes in institutional ownership in evaluating the relation between intraquarter patterns and stock returns, the empirical results are still restricted by choice of some cutoff rules for institutional trades.

  3. 3.

    \(\mathrm{HQFIIs}_{i,t},\) in the month t, is defined as

    $$\begin{aligned} \mathrm{HQFIIs}_{i,t}=\frac{B(i,t)}{B(i,t)+S(i,t)} \end{aligned}$$

    where B(it) (S(it)) is the number of QFIIs who increase (decrease) their holdings. Here, I calculate the buy propensity only for QFIIs. For those institutional investors of investment trust and dealers, they could not be identified individually in my sample and merely have the aggregate monthly institutional ownership for a stock.

  4. 4.

    The institutional investors’ holding percentages in the US stock market over the period from 1950 to 2000 can be found in the NYSE Factbook. For the statistics in 2010, it can be obtained from ‘The 2012 Statistical Abstract of United States Census Bureau.’

  5. 5.

  6. 6.

    The 1-year CAPM beta is only from January 2001 to September 2014.

  7. 7.

    The historical fixed deposit rate is taken from the Bank of Taiwan.

  8. 8.

    The SAS code is obtained by Mark (Shuai) Ma who modified based on the two-way clustered SE code from Professor John McInnis. To obtain unbiased estimates in finite samples, the clustered standard errors are adjusted by \((N-1)\)/\((N-P)\)\(G/(G-1)\), where N is the sample size, P is the number of independent variables, and G is the number of clusters.

  9. 9.

    Compound return on an implementable strategy is based on investment at time 0 and is fully reinvested at each subsequent time point. During the investment period, no cash is deposited or withdrawn. The compound return between times t and T is \(R(t,T)=\prod _{s=t+1}^T (1+R_s)\), where \(R_s\) is the s-period portfolio return.


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We thank the seminar participants at National Chung Hsing University, Tohoku University, 2015 Taiwan Economics Research Summer Meeting, and 2016 Asian Meeting of the Econometric Society for their suggestions. Notably, we are grateful to the Editor, Bertrand Candelon, and an anonymous referee for their valuable comments.

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Correspondence to Hongwei Chuang.

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This study was funded by 2016 Nomura Foundation (AE-06) and JSPS KAKENHI 17K13759 JP.

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Chuang declares that he has no conflict of interest.

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This article does not contain any studies with human participants or animals performed by any of the authors.

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Chuang, H. The impacts of institutional ownership on stock returns. Empir Econ 58, 507–533 (2020).

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  • Institutional investors
  • Herding
  • Momentum effect

JEL Classification

  • G11
  • G12
  • G14