Passive Institutional Ownership, R2 Trends, and Price Informativeness

A distinctive trend in the capital markets over the past two decades is the rise in equity ownership of passive financial institutions. We propose that this rise has a negative effect on price informativeness. By not trading around firm‐specific news, passive investors reduce the firm‐specific compo...

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Bibliographic Details
Published in:The Financial review (Buffalo, N.Y.) N.Y.), 2017-11, Vol.52 (4), p.627-659
Main Authors: DeLisle, R. Jared, French, Dan W., Schutte, Maria Gabriela
Format: Article
Language:English
Subjects:
Capital markets
comovement
correlated trading
Financial institutions
G14
G15
G18
informed trading
institutional ownership
Investments
Investors
passive investing
price informativeness
Stocks
Trends
Volatility
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Summary:A distinctive trend in the capital markets over the past two decades is the rise in equity ownership of passive financial institutions. We propose that this rise has a negative effect on price informativeness. By not trading around firm‐specific news, passive investors reduce the firm‐specific component of total volatility and increase stock correlations. Consistent with this hypothesis, we find that the growth in passive institutional ownership is robustly associated with the growth in market model R2s of individual stocks since the early 1990s. Additionally, we find a negative relation between passive ownership and earnings predictability, an informativeness proxy.
ISSN:0732-8516
1540-6288
DOI:10.1111/fire.12132