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Institutional Investors, Households, and the Time-Variation in Expected Stock Returns

Published online by Cambridge University Press:  11 November 2021

Rüdiger Weber Open the ORCID record for Rüdiger Weber [Opens in a new window]
Rüdiger Weber*
Affiliation:
WU Vienna University of Economics and Business and Vienna Graduate School of Finance
*
ruweber@wu.ac.at (corresponding author)
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Abstract

I document a new stylized fact: The higher the degree of institutional ownership (IO) in a portfolio, the more time-varying expected returns rather than changes in expected cash flows drive changes in its valuation. Empirical evidence suggests that institutions’ time-varying sensitivity to the risk of holding stocks translates into time-varying expected returns on high-IO stocks. In my model, imperfect risk sharing between different types of investors generates cross-sectional differences in return predictability based on ownership, even among a priori identical stocks. My findings suggest an economic rationale for weak return predictability of small stocks and predictability reversals of stocks and real estate investment trusts.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 352 - 391
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

I would like to thank Laurent Barras, Jules van Binsbergen, John Cochrane, Jennifer Conrad (the editor), Zhi Da, Robert Dittmar, Winston Dou, Benjamin Golez, Andrei Gonçalves (the referee), Alexander Hillert, Byoung-Hyoun Hwang, Donald Keim, Holger Kraft, Jochen Lawrenz, Paulo Maio, Christoph Meinerding, Tyler Muir, Christian Opp, Cameron Peng, Nikolai Roussanov, Christian Schlag, Martin Schmalz, Tobias Sichert, Robert Stambaugh, Luke Taylor, Julian Thimme, Gertjan Verdickt, Jessica Wachter, Christian Wagner, Annika Weber, Michael Weber, Patrick Weiß, Ivo Welch, Amir Yaron, and seminar participants at Frankfurt (Goethe), Philadelphia (Wharton), Karlsruhe (KIT), Ann Arbor (Michigan Ross), Paris (Dauphine), Rotterdam (RSM), Vienna (WU and UniVie), Odense (SDU), the Cologne Colloquium on Financial Markets, the SGF Swiss Finance Conference, and the DGF German Finance Association meetings for valuable comments and insightful discussions. Parts of this article were written while I was visiting Wharton. I gratefully acknowledge funding from DAAD German Academic Exchange Service during that time.

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