Review of Asset Pricing Studies (Forthcoming)
53 Pages Posted: 25 Aug 2015 Last revised: 26 Feb 2017
Date Written: February 1, 2017
We show that an increase in a stock’s breadth of institutional ownership or turnover is followed by a significant but temporary increase in its CAPM beta estimate and a decrease in its CAPM alpha. The increasing effect of breadth of ownership on beta estimates strengthens if we classify institutional investors by their historical trading horizon and look at the effect of changes in the ownership breadth of short-horizon institutional investors. These transitory, trading activity-driven components of beta estimates that we find contribute to the empirical failure of the CAPM and the large returns to long-short portfolios that bet against beta. In addition, the relations between ownership breadth, turnover and betas that we document help explain the puzzling fact that on average betas increase after seasoned equity offerings and stock splits, and decrease after stock repurchases.
Keywords: Beta, CAPM, Comovement, Institutional investors
JEL Classification: G12
Suggested Citation: Suggested Citation