Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-03T05:20:57.668Z Has data issue: false hasContentIssue false
  • English
  • Français

Investor Heterogeneity and Liquidity

Published online by Cambridge University Press:  03 June 2022

Kalok Chan Open the ORCID record for Kalok Chan [Opens in a new window] ,
Si Cheng Open the ORCID record for Si Cheng [Opens in a new window]  and
Allaudeen Hameed Open the ORCID record for Allaudeen Hameed [Opens in a new window]
Kalok Chan*
Affiliation:
Chinese University of Hong Kong CUHK Business School
Si Cheng
Affiliation:
Syracuse University Whitman School of [email protected]
Allaudeen Hameed
Affiliation:
National University of Singapore NUS Business [email protected]
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

Fund flows are more correlated among funds with similar investment horizon, consistent with correlated demand for liquidity. We find that stocks held by institutions with more heterogeneous investment horizon are more liquid and have lower volatility of liquidity. Identification tests confirm that the improvement in stock liquidity holds when the increase in investor heterogeneity arises from an exogenous shock due to the 2003 tax reform. In addition, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have a less heterogeneous investor base. Moreover, the premium associated with stock illiquidity is concentrated in stocks with low investor heterogeneity.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 7 , November 2022 , pp. 2798 - 2833
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank an anonymous referee, Ruchith Dissanayake, Wayne Ferson, Jarrad Harford (the editor), Fuwei Jiang, He Wang, David Whidbee, conference and seminar participants at the Chinese University of Hong Kong, 2017 Asian Finance Association Annual Meeting, 2017 China International Conference in Finance, and SFS Cavalcade Asia-Pacific 2017 for helpful comments. Chan acknowledges financial support from the Hong Kong Research Grants Council (Project #: GRF 690013). Hameed acknowledges financial support from NUS Academic Research Grant R--315-000-124-115.

References

Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Amihud, Y.; Hameed, A.; Kang, W.; and Zhang, H.. “The Illiquidity Premium: International Evidence.” Journal of Financial Economics, 117 (2015), 350–368.Google Scholar
Amihud, Y., and Mendelson, H.. “Asset Pricing and the Bid–Ask Spread.” Journal of Financial Economics, 17 (1986), 223–249.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “A Catering Theory of Dividends.” Journal of Finance, 59 (2004), 1125–1165.CrossRefGoogle Scholar
Bennett, J. A.; Sias, R. W.; and Starks, L. T.. “Greener Pastures and the Impact of Dynamic Institutional Preferences.” Review of Financial Studies, 16 (2003), 1203–1238.CrossRefGoogle Scholar
Ben-Raphael, A.; Kadan, O.; and Wohl, A.. “The Diminishing Liquidity Premium.” Journal of Financial and Quantitative Analysis, 50 (2015), 197–229.CrossRefGoogle Scholar
Bernardo, A. E., and Welch, I.. “Liquidity and Financial Market Runs.” Quarterly Journal of Economics, 119 (2004), 135–158.CrossRefGoogle Scholar
Blume, M. E., and Keim, D. B.. “The Changing Nature of Institutional Stock Investing.” Critical Finance Review, 6 (2017), 1–41.CrossRefGoogle Scholar
Brockman, P.; Chung, D. Y.; and Yan, X.. “Block Ownership, Trading Activity, and Market Liquidity.” Journal of Financial and Quantitative Analysis, 44 (2009), 1403–1426.CrossRefGoogle Scholar
Busse, J. A.; Chordia, T.; Jiang, L.; and Tang, Y.. “Transaction Costs, Portfolio Characteristics, and Mutual Fund Performance.” Management Science, 67 (2021), 1227–1248.Google Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Cella, C.; Ellul, A.; and Giannetti, M.. “Investors’ Horizons and the Amplification of Market Shocks.” Review of Financial Studies, 26 (2013), 1607–1648.CrossRefGoogle Scholar
Chen, J.; Hong, H.; and Stein, J. C.. “Breadth of Ownership and Stock Returns.” Journal of Financial Economics, 66 (2002), 171–205.CrossRefGoogle Scholar
Cheng, S.; Hameed, A.; Subrahmanyam, A.; and Titman, S.. “Short-Term Reversals: The Effects of Past Returns and Institutional Exits.” Journal of Financial and Quantitative Analysis, 52 (2017), 143–173.Google Scholar
Chetty, R., and Saez, E.. “Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut.” Quarterly Journal of Economics, 120 (2005), 791–833.Google Scholar
Chevalier, J., and Ellison, G.. “Risk Taking by Mutual Funds as a Response to Incentives.” Journal of Political Economy, 105 (1997), 1167–1200.CrossRefGoogle Scholar
Choi, J. J., and Robertson, A. Z.. “What Matters to Individual Investors? Evidence from the Horse’s Mouth.” Journal of Finance, 75 (2020), 1965–2020.CrossRefGoogle Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Recent Trends in Trading Activity and Market Quality.” Journal of Financial Economics, 101 (2011), 243–263.CrossRefGoogle Scholar
Chordia, T.; Subrahmanyam, A.; and Anshuman, V. R.. “Trading Activity and Expected Stock Returns.” Journal of Financial Economics, 59 (2001), 3–32.CrossRefGoogle Scholar
Chordia, T.; Subrahmanyam, A.; and Tong, Q.. “Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity?” Journal of Accounting and Economics, 58 (2014), 51–58.CrossRefGoogle Scholar
Coval, J., and Stafford, E.. “Asset Fire Sales (and Purchases) in Equity Markets.” Journal of Financial Economics, 86 (2007), 479–512.CrossRefGoogle Scholar
Cremers, M., and Pareek, A.. “Short-Term Trading and Stock Return Anomalies: Momentum, Reversal, and Share Issuance.” Review of Finance, 19 (2015), 1649–1701.CrossRefGoogle Scholar
Cremers, M., and Pareek, A.. “Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently.” Journal of Financial Economics, 122 (2016), 288–306.CrossRefGoogle Scholar
Da, Z.; Gao, P.; and Jagannathan, R.. “Impatient Trading, Liquidity Provision, and Stock Selection by Mutual Funds.” Review of Financial Studies, 24 (2011), 675–720.CrossRefGoogle Scholar
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 1035–1058.CrossRefGoogle Scholar
Diamond, D. W., and Verrecchia, R. E.. “Constraints on Short-Selling and Asset Price Adjustment to Private Information.” Journal of Financial Economics, 18 (1987), 277–311.CrossRefGoogle Scholar
Diether, K. B.; Lee, K.-H.; and Werner, I. M.. “Short-Sale Strategies and Return Predictability.” Review of Financial Studies, 22 (2009), 575–607.Google Scholar
Falkenstein, E. G. “Preferences for Stock Characteristics as Revealed by Mutual Fund Portfolio Holdings.” Journal of Finance, 51 (1996), 111–135.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?” Journal of Financial Economics, 60 (2001), 3–43.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 71 (1973), 607–636.CrossRefGoogle Scholar
Gao, X., and Ritter, J.. “The Marketing of Seasoned Equity Offerings.” Journal of Financial Economics, 97 (2010), 33–52.CrossRefGoogle Scholar
Gaspar, J.-M., and Massa, M.. “Local Ownership as Private Information: Evidence on the Monitoring-Liquidity Trade-Off.” Journal of Financial Economics, 83 (2007), 751–792.CrossRefGoogle Scholar
Gaspar, J.-M.; Massa, M.; and Matos, P.. “Shareholder Investment Horizons and the Market for Corporate Control.” Journal of Financial Economics, 76 (2005), 135–165.Google Scholar
Goyenko, R. Y.; Holden, C. W.; and Trzcinka, C. A.. “Do Liquidity Measures Measure Liquidity?” Journal of Financial Economics, 92 (2009), 153–181.CrossRefGoogle Scholar
Greenwald, B. C. N.; Kahn, J.; Sonkin, P. D.; and van Biema, M.. Value Investing: From Graham to Buffett and Beyond. New York: Wiley & Sons (2001).Google Scholar
Hameed, A., and Xie, J.. “Preference for Dividends and Return Comovement.” Journal of Financial Economics, 132 (2019), 103–125.CrossRefGoogle Scholar
Heflin, F., and Shaw, K. W.. “Blockholder Ownership and Market Liquidity.” Journal of Financial and Quantitative Analysis, 35 (2000), 621–633.CrossRefGoogle Scholar
Hoberg, G., and Prabhala, N. R.. “Disappearing Dividends, Catering, and Risk.” Review of Financial Studies, 22 (2009), 79–116.CrossRefGoogle Scholar
Morris, S., and Shin, H. S.. “Liquidity Black Holes.” Review of Finance, 8 (2004), 1–18.CrossRefGoogle Scholar
Nagel, S. “Short Sales, Institutional Investors and the Cross-Section of Stock Returns.” Journal of Financial Economics, 78 (2005), 277–309.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple Positive-Definite Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Pástor, L., and Stambaugh, R.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 113 (2003), 642–685.CrossRefGoogle Scholar
Prado, M. P.; Saffi, P. A. C.; and Sturgess, J.. “Ownership Structure, Limits to Arbitrage, and Stock Returns: Evidence from Equity Lending Markets.” Review of Financial Studies, 29 (2016), 3211–3244.CrossRefGoogle Scholar
Sialm, C., and Starks, L.. “Mutual Fund Tax Clienteles.” Journal of Finance, 67 (2012), 1397–1422.CrossRefGoogle Scholar
Sialm, C.; Starks, L. T.; and Zhang, H.. “Defined Contribution Pension Plans: Sticky or Discerning Money?” Journal of Finance, 70 (2015), 805–838.CrossRefGoogle Scholar
Sirri, E. R., and Tufano, P.. “Costly Search and Mutual Fund Flows.” Journal of Finance, 53 (1998), 1589–1622.Google Scholar
Yan, X., and Zhang, Z.. “Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?” Review of Financial Studies, 22 (2009), 893–924.CrossRefGoogle Scholar
Supplementary material: PDF

Chan et al. supplementary material

Chan et al. supplementary material

Download Chan et al. supplementary material(PDF)
PDF 218.4 KB