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Ownership breadth: Investor recognition or short-sale constraints?

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  • Cao, Zhiqi
  • Wu, Wenfeng

Abstract

Miller (1977)’s short-sale constraints hypothesis and Merton (1987)’s investor recognition hypothesis infer opposite relationships between ownership breadth and future stock returns. We find the mixed empirical evidence in prior literature comes from opposite effects of positive and negative breadth changes on returns. The breadth-future return relationship is positive when breadth decreases, whereas the relationship becomes negative when breadth increases. Our results suggest that the investor recognition hypothesis dominates when breadth increases, whereas the short-sale constraints hypothesis dominates when breadth decreases. This reconciles not only the conflicting evidence but also the predictions of Miller (1977) and Merton (1987).

Suggested Citation

  • Cao, Zhiqi & Wu, Wenfeng, 2022. "Ownership breadth: Investor recognition or short-sale constraints?," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s154461232200143x
    DOI: 10.1016/j.frl.2022.102847
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    References listed on IDEAS

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    1. Lof, Matthijs & van Bommel, Jos, 2023. "Asymmetric information and the distribution of trading volume," Journal of Corporate Finance, Elsevier, vol. 82(C).

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    More about this item

    Keywords

    Ownership breadth; Stock returns; Investor recognition; Short-sale constraints;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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