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Institutional Investment Constraints and Stock Prices

Published online by Cambridge University Press:  09 March 2017

Jie Cao ,
Bing Han  and
Qinghai Wang
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Abstract

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We test the hypothesis that investment constraints in delegated portfolio management may distort demand for stocks, leading to price underreaction to news and stock return predictability. We find that institutions tend not to buy more of a stock with good news that they already overweight; they are reluctant to sell a stock with bad news that they already underweight. Stocks with good news overweighted by institutions subsequently significantly outperform stocks with bad news underweighted by institutions. The impact of institutional investment constraints sheds new light on asset pricing anomalies such as stock price momentum and post–earnings announcement drift.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 2 , April 2017 , pp. 465 - 489
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1

We thank Stephen Brown (the editor), Aydogan Alti, Michael Brennan, John Griffin, Jean Helwege, David Hirshleifer, Kewei Hou, Jennifer Huang, Hao Jiang (the referee), Jonathan Lewellen, Stefan Nagel, Laura Starks, Rene Stulz, Michael Stutzer, Siew-Hong Teoh, Sheridan Titman, Ralph Walkling, Russ Wermers, Lu Zheng, and seminar participants at the Hong Kong University of Science and Technology, Peking University, Ohio State University, the University of Texas at Austin, the 2007 Financial Management Association Meetings, and the 2005 Western Finance Association Meetings for helpful discussions and comments. All remaining errors are our own. The work described in this paper was partially supported by a grant from the Research Grant Council of the Hong Kong Special Administrative Region, China (Project No. CUHK 458212).

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