Quotation Weber, Rüdiger. 2019. Institutional Investors and the Time-Variation in Expected Stock Returns. DGF German Finance Association, Essen, Deutschland, 27.09.-28.09.


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Abstract

I document a new stylized fact: the higher the share of institutional ownership in a stock, the more its price-dividend ratio is driven by discount rate variation rather than by changes in dividend growth expectations. Hence, the dividend-price ratio of stocks with high institutional ownership predicts returns. Conversely, for stocks held mostly by individual investors, returns are not predictable. As a general equilibrium outcome, return predictability crucially depends on the properties of the marginal investor. More strongly time-varying volatility in the marginal utility of institutions acting as marginal investors in the respective stocks provides a natural explanation for the observed pattern. In an equilibrium model, time-varying redemption risks generate the observed predictability patterns among a priori identical stocks. My findings help explain the weak return predictability of small and value stocks, the postwar predictability reversal, and the fact that dividend smoothing cannot explain that reversal.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Paper presented at an academic conference or symposium
Language English
Title Institutional Investors and the Time-Variation in Expected Stock Returns
Event DGF German Finance Association
Year 2019
Date 27.09.-28.09
Country Germany
Location Essen
URL https://www.dgf2019.wiwi.uni-due.de/home/

Associations

People
Weber, Rüdiger (Details)
Organization
Institute for Finance, Banking and Insurance IN (Details)
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