INSTITUTIONAL OWNERHSIP AND ABNORMAL RETURNS

We have two hypotheses in our paper: higher institutional ownership is associated with lower abnormal returns because of less information asymmetry, or is associated with higher abnormal returns because of institutional investors’ ability to pick better stocks. We test which of these two hypotheses concerning the effect of institutions dominates. We categorize all companies listed on the 13F schedule of Thompson-Reuters over the period 1980-2014 into five portfolios and rebalance the portfolios annually based on their level of institutional ownership percentage. We determine portfolio’s abnormal return by conducting regression on portfolio returns based on CAPM and Fama French and Carhart four-factor model.Our finding is, in general, portfolios with higher institutional ownership tend to have higher abnormal returns. We also find that the higher the institutional ownership percentage of one portfolio, the more five-year periods during which the portfolio has abnormal returns. In addition, the abnormal returns of portfolio formed by going long on highest-institutional-ownership and short on lowest-institutional ownership portfolio are significantly positive based on CAPM Model from 1980 to 2014 but are not significantly different from zero in most five-year time periods.