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Institutional Investment and the Turn-of-the-Month Effect: Evidence from REITs

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Abstract

Many studies have hypothesized that the turn-of-the-month effect is caused by institutional investment. However, there is little evidence to support this hypothesis. This study provides an empirical test that measures the impact of the level of institutional investment on the turn-of-the-month effect using a sample of REITs over the period 1980 to 2004. We find that a significant change in the turn-of-the-month effect occurred following the Omnibus Reconciliation Act of 1993 which relaxed the requirements on the level of institutional investment in REITs. The evidence suggests that the dramatic rise in institutional holdings can account for a good part of this change. However, the impact of institutional investment may not be as large as some researchers have suspected. There is no evidence to suggest that institutional investment impacts returns on the day when the turn-of-the-month effect is most pronounced, suggesting that this calendar anomaly is not caused exclusively by institutional investors in the market.

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Notes

  1. For example, the turn-of-the-month effect has been documented in domestic stock markets (Ariel 1987), REIT stocks (Redman, Manakyan and Liano 1997) and bond markets (Jordan and Jordan 1991).

  2. International evidence for the turn-of-the-month effect has been discovered in Italy (Barone 1990), Japan (Ziemba 1991), the UK (Ziemba 1994), Finland (Martikainen et al. 1995), Australia, Canada, Germany and Switzerland (Cadsby and Ratner 1992). In addition, several studies find evidence for this effect in multiple countries over a consistent sample period (Agrawal and Tandon 1994 and Kunkel, Compton and Beyer 2003).

  3. See Lo and MacKinlay (1990).

  4. Footnote 18, p. 417

  5. In fact, REITs are currently required to payout at least 90% of the net operating income (NOI) as dividends to shareholders. Wang, Erickson and Gau (1993) find that this requirement is often not binding, and the actual payout is about 165% of the NOI.

  6. These factors include changes in market risk, the term structure of interest rates and unexpected inflation (see Chan et al. 1990).

  7. See Ghosh, Miles and Sirmans (1996).

  8. Size effects were introduced as a market anomaly by Banz (1981), and the January effect was introduced by Rozeff and Kinney (1976).

  9. For example, see Merrill (1966).

  10. French (1980) documents that the mean Monday return is significantly lower than during the rest of the week.

  11. Even though the analysis begins in 1980 (coinciding with the availability of institutional ownership data) this construct includes REITs that entered the market prior to 1980.

  12. These studies are primarily focused on the January effect, and generally find that the January effect tends to be driven by the performance of small firms. However, similar studies find that the turn-of-the-month effect is prevalent in the returns of both small and large firms.

  13. To isolate short-run IPO effects we ran separate regressions omitting observations for the first quarter of a firm’s existence. The results of this approach are not shown, but are quite similar to the general results provided.

  14. To test for the potential impact of survivorship bias, we ran separate regressions that included dummy variables and interaction terms to consider the impact of firms that were delisted during the sample period. Although the results are not shown, it is worth noting that we did not find a significant difference with respect to the impact of institutional investment and the turn-of-the-month effect for these firms.

  15. For example, Jansen and de Vries (1991) argue that daily stock returns can be sufficiently modeled by a t distribution, which is fatter-tailed than the normal.

  16. See, for example, Akgiray (1989) who uses a GARCH model which assumes conditional heteroskedasticity.

  17. See Newey and West (1987).

  18. See Gross and Steiger (1979).

  19. The ARCH model was introduced by Engle (1982) and the more flexible generalization of this model which allows for an ARCH process with long lag length is provided by Bollerslev (1986).

  20. Specifically, we use the GARCH process suggested by Taylor (1986).

  21. Since institutional investment is reported quarterly, this variable reports the percentage of shares held by institutional investors at the beginning of the quarter for every day in that quarter.

  22. The month of January and year 1980 are excluded.

  23. See Kruskal and Wallis (1952).

  24. In the interest of brevity, the estimates for the month and year dummy variables from the GLM model are not shown.

  25. The H statistic is distributed c 2 with 1 degree of freedom (see Kruskal and Wallis 1952).

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Authors and Affiliations

  1. College of Charleston, Charleston, SC, USA

    Jonathan A. Wiley

  2. The University of Alabama, Tuscaloosa, AL, USA

    Leonard V. Zumpano

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  1. Jonathan A. Wiley
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  2. Leonard V. Zumpano
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Correspondence to Jonathan A. Wiley.

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Wiley, J.A., Zumpano, L.V. Institutional Investment and the Turn-of-the-Month Effect: Evidence from REITs. J Real Estate Finan Econ 39, 180–201 (2009). https://doi.org/10.1007/s11146-008-9106-6

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