Multiple academic studies indicate that stocks with high institutional ownership tend to outperform those with low institutional ownership:
• A 2003 empirical study found that, on average, the largest high institutional ownership (IO) stocks outperformed their low-IO counterparts (matched by size and book-to-market) by about 60 basis points (0.6%) per month.
• Another study demonstrated that higher institutional ownership is associated with higher out-of-sample abnormal returns, even after controlling for firm size. A long-short strategy—buying high-IO stocks and shorting low-IO stocks—produced positive excess returns (0.36% per month under the market model and 0.17% under a four-factor model), with statistically significant alphas.
• Research also shows that firms with high institutional ownership generally have higher stock prices and that institutional investors’ trading can lead to superior performance relative to the market.
• Additional findings suggest that increases in institutional ownership are correlated with future outperformance: firms with the largest increases in institutional ownership outperformed those with the largest decreases by 5.43% in the following year.
These results are robust across different time periods and methodologies, and the positive relationship holds even after accounting for other factors such as firm size. The outperformance is often attributed to institutional investors’ superior access to information, analytical resources, and trading acumen.
In summary, there is strong academic evidence that stocks with high institutional ownership tend to outperform those with low institutional ownership over time
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