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Big Fish in a Small Pond: Institutional Trading of Penny Stocks

Author

Listed:
  • Wei Huang

    (Accounting and Finance Department, College of St. Benedict and St. John’s University, Collegeville, MN 56321, USA)

  • George J. Jiang

    (Gary P. Brinson Chair of Investment Management, Department of Finance and Management Science, College of Business, Washington State University, Pullman, WA 99164, USA)

Abstract

There has been a steady increase in institutional ownership of penny stocks over the past decades. Nevertheless, we show that penny stocks bought by institutional investors significantly underperform other penny stocks in subsequent four quarters. This poor performance is mainly driven by quasi-indexers, i.e., institutions with passive and widely diversified investment strategies. In comparison, dedicated institutions, i.e., those with low turnover but large average investments in portfolio firms and a commitment to “relationship investing”, have marginally significant ability in trading penny stocks.

Suggested Citation

  • Wei Huang & George J. Jiang, 2020. "Big Fish in a Small Pond: Institutional Trading of Penny Stocks," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 1-31, June.
    • Handle: RePEc:wsi:qjfxxx:v:10:y:2020:i:02:n:s2010139220500056
    DOI: 10.1142/S2010139220500056
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