Institutional-ownership Asset Pricing Factors
Two perspectives on institutional ownership (IO) motivate this study. First, institutions display preferences for certain stock characteristics; and their ownership has been shown to relate to asset pricing factors in apparently causal ways. Second, these 'preferences' may actually reflect constraints relating to liquidity and agency considerations that make investment in standard factor-mimicking portfolios infeasible. We provide a detailed analysis of this preference vs. constraint perspective. We then construct 'IO pricing factors' - standard factors restricted to stocks with meaningful IO - to frame the impact of IO on standard asset pricing factors, and to provide a framework for performance evaluation that recognizes the 'constraint' perspective. Our evidence refutes the constraint perspective, and finds that institutional performance is actually worse when handicapped to investable factors.
Dr Chau Chak Wing Building
