Idiosyncratic Volatility, Institutional Ownership, and Investment Horizon

Authors


  • The authors wish to thank an anonymous referee and John Doukas (the editor) for insightful comments and useful suggestions. We are also thankful to Sachin Modi, Lawrence Kryzanowski, Andrey Ukhov, and participants at the Financial Management Association, European Financial Management Association and Midwest Finance Association Meetings for helpful comments. Any remaining errors or omissions are the authors' alone.

Abstract

This paper reevaluates the cross-sectional effect of institutional ownership on idiosyncratic volatility by conditioning on institutions' investment horizon. Prior literature establishes a positive link between growing institutional ownership and idiosyncratic volatility. However, this effect may vary depending on the type of institutional ownership. We document that short-term (long-term) institutional ownership is positively (negatively) linked to idiosyncratic volatility in the cross section. These opposite effects persist after controlling for institutional preferences and information-based trading and remain qualitatively unchanged after controlling for endogeneity. This suggests that short-term (long-term) institutions exhibit higher (lower) trading activity, which increases (decreases) idiosyncratic volatility.

Ancillary