Financial Characteristics of Neglected and Institutionally Held Stocks

Institutional investors are important both because of the magnitude of their holdings and trading activity and because their decisions to buy or sell can signal a good takeover candidate as well as in some instances facilitate the takeover. However, little is known as to why institutions prefer one stock to another. Through discriminant analysis seven variables (six accounting ratios and size) are identified that reveal the differences in financial characteristics between neglected and strongly held firms. Regression analysis is then used to show that four variables from the set of seven discriminant variables are consistent predictors of the actual fraction of outstanding shares held by financial institutions. The analysis provides some support for the claims of corporate chief financial officers that institutions focus only on short-term performance. However long-term performance is also shown to be important.