Institutional Ownership and Future Stock Returns: An International Perspective

• Date: 01 March 2020
• Author: Evert Wipplinger,Teodor Dyakov
• Published date: 01 March 2020
• DOI: http://doi.org/10.1111/irfi.12203

Institutional Ownership

and Future Stock Returns: An

International Perspective

TEODOR DYAKOV

†

AND EVERT WIPPLINGER

‡

†

School of Economics and Business, VU Amsterdam and Tinbergen Institute,

Amsterdam, The Netherlands and

‡

School of Economics and Business, VU Amsterdam, Amsterdam, The Netherlands

ABSTRACT

We investigate the risk-adjusted performance of the aggregate equity hold-

ings and trades of 13,807 active mutual funds located in 16 countries

between 2001 and 2014. Using portfolio sorts, we find weak evidence that

institutional holdings exhibit positive subsequent risk-adjusted returns. How-

ever, any outperformance is unlikely to stem from short-term informational

advantage: stocks bought do not outperform stocks sold in the subsequent

quarter. This finding is robust to regressions of subsequent stock returns on

changes in institutional ownership and holds for different measurements of

institutional trading.

JEL Codes: F21; G14; G15; G23

Accepted: 9 May 2018

I. INTRODUCTION

Despite the success of the mutual fund industry in attracting investors, studies

find mixed evidence on whether institutional ownership and trading predict

future returns. For example, Nofsinger and Sias (1999) find a positive relation,

while Cai and Zheng (2004) find a negative one. Among others, Barras

et al. (2010) document a recent decreasing trend in mutual fund performance,

indicating a potentially weakening correlation between institutional trading

and subsequent stock returns. Most academic research focuses on domestic US

funds which constitute the single largest market. However, most assets (56% in

our sample) are managed by funds domiciled outside the USA. Moreover, only

33% of the funds are domiciled in the USA and the rest in less crowded coun-

tries (Khorana et al. 2005) where markets could offer more opportunities for

managers to exploit informational advantages.

© 2018 The Authors. International Review of Finance published by John Wiley & Sons Australia, Ltd on

behalf of International Review of Finance Ltd 2018.

This is an open access article under the terms of the Creative Commons Attribution License, which permits

use, distribution and reproduction in any medium, provided the original work is properly cited.

International Review of Finance, 20:1, 2020: pp. 235–245

DOI: 10.1111/irfi.12203