Passive Institutional Ownership, R2 Trends, and Price Informativeness. Issue 4 (8th October 2017)

• Record Type: Journal Article
• Authors: DeLisle, R. Jared; French, Dan W.; Schutte, Maria Gabriela
• Is Part Of: Financial review. Volume 52:Issue 4(2017)
• Page Start: 627
• Page End: 659
• Publication Date: 2017-10-08
• Subjects: comovement -- volatility -- informed trading -- correlated trading -- passive investing -- institutional ownership -- price informativeness -- G14 -- G15 -- G18; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1111/fire.12132
• Languages: English
• ISSNs: 0732-8516

Abstract

Abstract: 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 R 2 s of individual stocks since the early 1990s. Additionally, we find a negative relation between passive ownership and earnings predictability, an informativeness proxy.