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Using a broad panel of NYSE-listed stocks between 1983 and 2004, we study the relation between institutional shareholdings and the relative informational efficiency of prices, measured as deviations from a random walk. Stocks with greater institutional ownership are priced more efficiently, and we show that variation in liquidity does not drive this result. One mechanism through which prices become more efficient is institutional trading activity, even when institutions trade passively. But efficiency is also directly related to institutional holdings, even after controlling for institutional trading, analyst coverage, short selling, variation in liquidity, and firm characteristics. (JEL G12, G14) Institutional shareholdings and trading have increased dramatically over the past several decades. In 1965, members of the Securities Industries Association held 16 % of U.S. equities; in 2001, they held 61 % according to the Securities Industry Association Fact Book (2002). Moreover, nonretail trading accounted for 96 % of New York Stock Exchange (NYSE) trading volume in 2002 (Jones and Lipson 2004). How this broadened scope of institutional ownership and trading affects the quality of equity markets, however, is an open question.
Boehmer et al. (Fri,) studied this question.
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