Institutional Ownership and Time-Series Predictability of Stock Returns
Authors: Rüdiger Weber (Goethe University)
Title: Institutional Ownership and Time-Series Predictability of Stock Returns
Abstract: The predictability of cash-flows and returns by the dividend yield strongly depends on the identity of the marginal investor. When the marginal investor is an individual investor, dividends play the paramount role in the variation of the dividend yield. The importance of returns increases with the likelihood of the marginal investor being institutional. This novel feature of the data offers an explanation for the puzzling results of Chen's (2009) predictability reversal as the change from dividend to return predictability coincided with the rise of institutional investors, Maio and Santa-Clara's (2015) result that for small and value stocks, variation in the dividend yield is due to cash-flows and the result of Chen et al. (2012) that even for firms without smoothed dividends, returns are predictable in the post-war sample. The reason is likely to be found in the pricing kernel. I derive conditions on the pricing kernel that would generate such a pattern.