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Portfolio rebalancing, institutional ownership, and the small firm‐January effect

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  • David C. Porter
  • Gary E. Powell
  • Daniel G. Weaver

Abstract

We use monthly reported firm share ownership by institutions to provide direct evidence that portfolio rebalancing exists in the U.S. We find rebalancing exists in sufficient size to affect prices around the turn‐of‐the‐year and conclude that portfolio rebalancing may be a substantial part of the small firm‐January effect in the U.S. The findings are more important than simply evidence leading to the resolution of an anomaly since they cast doubt on our current asset pricing models and on previous efficient markets studies. The findings also suggest that investor's asset allocations may not be optimally determined without the inclusion of a portfolio rebalancing parameter.

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  • David C. Porter & Gary E. Powell & Daniel G. Weaver, 1996. "Portfolio rebalancing, institutional ownership, and the small firm‐January effect," Review of Financial Economics, John Wiley & Sons, vol. 5(1), pages 19-29, December.
    • Handle: RePEc:wly:revfec:v:5:y:1996:i:1:p:19-29
    DOI: 10.1016/S1058-3300(96)90003-8
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