Short Sales, Institutional Investors, and the Book-to-market Effect
- Topics:
- Assessment
- Tags:
- Finance,
- Investment,
- Investor,
- Sales,
- Stock
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Overview: When institutional ownership is low, stock loan supply tends to be sparse, and short-sale constraints are thus more likely to bind. This paper shows that the book-to-market (B/M) effect is concentrated among such difficult-to-short stocks: Holding size fixed, returns of low B/M stocks decline sharply with lower institutional ownership. Moreover, the underperformance of low B/M stocks is less pronounced among stocks held by passive investors with large stock lending programs. Finally, return predictability effects attributed to short-sale constraints in prior research (breadth of ownership effect; loser momentum) are most evident among stocks with low B/M and low institutional ownership. These findings suggest that overpricing of costly-to-short low B/M stocks rather than risk factor exposure generates much of the book-to-market effect in stock returns.
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Format: HTML | Date: Feb 2003 | Pages: 1
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