Do Institutional Investors Prefer Near-Term Earnings over Long-Run Value?

Brian J. Bushee

Assistant Professor of Business Administration

Graduate School of Business Administration
Harvard University
Boston, MA 02163
[email protected]
tel: (617) 495-5056
fax: (617) 496-7387

First version: August 1994

Current version: April 1999

I would like to thank Jeff Abarbanell, Vic Bernard, Dawn Matsumoto, Greg Miller, Lillian Mills,
and Jana Raedy for their helpful comments and suggestions. I also gratefully acknowledge the
financial support of the Coopers and Lybrand Foundation.
 Do Institutional Investors Prefer Near-Term Earnings over Long-Run Value?

Abstract

Critics often argue that institutional investors have an excessive focus on short-term firm
performance that leads corporate managers to make decisions to boost short-term earnings at the
expense of long-run value. This paper examines whether institutional investors exhibit
preferences for near-term earnings over long-run value and whether such preferences have
implications for firms’ stock prices. Using the Ohlson [1995] model, I separate firm value into
three components—book value, expected near-term earnings, and expected long-term (terminal)
value—and test whether institutions prefer firms for which more of firm value is expected to be
realized as near-term earnings rather than as long-term earnings. The results indicate that the
level of ownership by institutions with short investment horizons (transient institutions) and by
institutions held to stringent fiduciary standards (banks) is positively (negatively) associated with
the amount of value in near-term (long-term) earnings. This evidence indicates that institutions
with the strongest incentives to favor firms with a high proportion of value in near-term earnings
exhibit such preferences.
This evidence that banks and transient institutions prefer near-term earnings over long-
run value raises the question of whether such institutions myopically price firms, overweighting
short-term earnings potential and underweighting long-term earnings potential. Evidence of such
myopic pricing would establish a link through which institutional investors could pressure
managers into a short-term focus. The results provide no evidence that high levels of ownership
by banks translate into myopic mispricing. However, high levels of transient ownership are
associated with an over- (under-) weighting of near-term (long-term) expected earnings and a
trading strategy based on this finding generates significant abnormal returns. This finding
supports the concerns that many corporate managers have about the adverse effects of an
ownership base dominated by short-term-focused institutional investors.
I. Introduction

A recurrent claim cited throughout the popular press and academic literature is that

institutional investors have a myopic focus on short-term firm performance that leads corporate

managers to make operational and accounting decisions to boost short-term earnings at the

expense of long-run value (see, e.g. Jacobs [1991], Porter [1992], and Laverty [1996]). This

paper examines whether institutional investors exhibit preferences for expected near-term

earnings at the expense of expected long-run value and whether such preferences have any

implications for the relative weighting of these components in firms’ stock prices. A finding of

institutional preferences for near-term earnings would provide evidence in support of the claim

that managers feel pressure from institutions to myopically maximize near-term earnings. Such

evidence would also raise the question of whether institutions myopically price firms,

overweighting short-term earnings potential and underweighting long-term earnings potential.

Evidence of such myopic pricing would establish a link through which institutional investors

could pressure managers into a short-term focus.

Prior work has tested for institutional investor myopia with respect to near-term earnings

by examining the relation between institutional trading and contemporaneous earnings news,

finding a positive association (Lang and McNichols [1997], Eames [1998]). Because current

earnings news has implications for longer-term earnings, it is difficult to determine from this

approach whether institutions are reacting to current earnings per se or to the long-run

implications of current earnings. To separate out preferences for near-term earnings from

preferences for long-run value, I use a valuation model based on Ohlson [1995] that segregates

firm value into components (book value, near-term earnings, long-run value) based on when the

value will be realized through earnings. Using this decomposition, I can test for whether

1
institutions prefer firms with more value to be realized through near-term earnings rather than

through long-term earnings. If a firm’s institutional ownership is focused on expected earnings

in the next few years, then the manager of that firm may have strong incentives to make

decisions to meet or exceed that expected performance, even if the choices harm long-run value.

After controlling for numerous factors known to be important in determining the level of

institutional ownership, I find that institutions as a whole have weak preferences for near-term

earnings at the expense of long-term earnings, providing limited evidence in support of

institutional investor myopia. However, disaggregating institutional investors into groups based

on their incentives to prefer short-term earnings reveals significant heterogeneity in institutional

preferences for the distribution of firm value. I find that the level of ownership by institutions

with short investment horizons (“transient” institutions) and by institutions that are held to the

most stringent fiduciary standards (bank trusts) is positively associated with the amount of value

in near-term earnings and negatively associated with the proportion of value in long-term

earnings. This evidence indicates that institutions with the strongest incentives to favor firms

with a high proportion of value in near-term earnings exhibit such preferences.

To test whether institutional preferences for near-term earnings cause stocks to be priced

myopically, I use a methodology similar to Abarbanell and Bernard [1998] (AB). AB regresses

stock price on book value, the present value of near-term earnings, and the present value of a

terminal value and find no evidence of myopic pricing by the market as a whole. However, if

certain types of institutions exhibit strong preferences for near-term earnings over long-run

value, then firms with high levels of such institutional ownership and with this distribution of

value might exhibit myopic pricing due to the high institutional demand for the stock. I modify

the AB regression to include interaction terms for firms with high levels of institutional

2
ownership to test whether institutions overpay (underpay) for near-term value (long-term value).

Because a coefficient that differs from the hypothesized value in this test could either indicate

mispricing or measurement error (AB), I also perform future returns tests to examine whether

profitable trading strategies can be executed based on instances of apparent mispricing.

Significant returns from these strategies would be consistent with mispricing, whereas

insignificant returns would suggest measurement error.

The results indicate that high levels of ownership by transient institutions, who exhibit

strong preferences for near-term earnings, are associated with overweighting of the near-term

earnings component of value and underweighting of the long-term earnings component. The

future returns test finds trading strategy returns that are consistent in sign with mispricing, and

statistically significant two-to-three years after the portfolio formation date. Thus, transient

institutions not only exhibit strong preferences for near-term earnings, but these preferences also

translate into significant misvaluations. In the case of banks, the other group of institutions with

strong preferences for near-term earnings, I find no significant evidence of mispricing when

banks have high levels of ownership. Because I report that most banks have longer holding

periods than transient institutions, these results suggest that short-term preferences of institutions

only translate into mispricing when institutions also have short investment horizons.

The next section reviews the claims and evidence of institutional myopia and develops

testable hypotheses. Section III presents the valuation model and methodology used to test the

hypotheses. Section IV describes the sample and provides descriptive statistics on the constructs

used in the empirical tests. Section V provides results, and Section VI contains a summary and

conclusions.

3
II. Hypothesis Development

2.1 Do institutional investors prefer near-term earnings over long-run value?

As institutional investors became the dominant equity holder in the US during the past

twenty years, many critics expressed concerns that the alleged short-term focus of institutional

investors creates pressures on US managers to make decisions that sacrifice long-term value to

meet short-term goals (see Lowenstein [1988], Jacobs [1991], Porter [1992], and Laverty [1996]

for detailed descriptions of these concerns). For example, Drucker [1986] argues that "corporate

managements are being pushed [by institutional investors] into subordinating everything (even

such long-range considerations as a company's market standing, its technology, indeed its basic

wealth producing capacity) to immediate earnings and next week's stock price" (p. 32).

Whether or not institutions are actually applying this pressure, managers believe they are under

such pressure. In a Business Week/Harris poll of 400 CEO's, 60% of the respondents cited

institutional investors as a prime source of short-term performance pressure (Nussbaum [1987]).

Prior research on whether institutional investors exhibit a short-term focus in their

investment decisions has found limited evidence to support this concern. Numerous papers have

tested whether institutions prefer firms with lower levels of investment in long-term projects like

R&D (Baysinger et al 1991, Hansen and Hill 1991, Wahal and McConnell 1998). The evidence

generally indicates that institutional ownership is positively associated with R&D spending,

implying that institutional investors are not myopic. Additionally, Rajgopal and Venkatachalam

[1998] find no evidence that the level of institutional ownership is associated with income-

increasing accruals, which suggests that institutions do not pressure managers to maximize near-

term earnings. However, institutions could still be focused on short-term earnings performance

if, in these cases, R&D or accrual changes are not needed to meet current earnings goals.

4
 Looking at institutional myopia with respect to current earnings, Eames [1998] finds

limited evidence of institutional trading in response to annual earnings news. However, Lang

and McNichols [1997] find evidence of a positive relationship between changes in institutional

holdings and both quarterly earnings forecast errors and quarterly revisions of forecasts of one-

year-ahead earnings. This finding indicates a sensitivity to short-term earnings news, but does

not necessarily imply myopia because longer-term earnings are likely highly correlated with the

short-term news. Thus, the evidence to date on institutional short-sightedness is difficult to

interpret due to the lack of a good methodology for showing that institutions prefer near-term

earnings at the expense of longer-term earnings, as implied by the myopia argument.

This paper makes two methodological extensions to prior work to test for institutional

preferences for near-term earnings over long-run value. First, using the Ohlson [1995] valuation

model, I segregate firm value into three categories—book value, near-term abnormal earnings,

and long-run (terminal) value—to control for the long-term value implications of near-term

earnings realizations. Book value represents that component of firm value that has already been

captured by the accounting system. The near-term abnormal earnings component represents firm

value that will be realized through earnings in the next four years. Long-run value is the

remainder of firm value, which will only be captured by the accounting system through earnings

after four years. In regressing the level of institutional holdings on these three categories, the

relative weightings indicate any institutional preferences over the timing with which firm value

will be recognized into the financial statements.

Second, this paper uses the arguments for why institutions would have preferences for

near-term earnings to focus on the types of institutions most likely to exhibit such preferences.

There are two widely-cited sources of the alleged short-term focus by institutions: short expected

5
investment horizons and strict fiduciary responsibilities (Porter [1992], Graves and Waddock

[1990]). Prior research indicates that institutions are not a homogeneous group along either of

these dimensions (Del Guercio [1996], Lang and McNichols [1997], Bushee [1998]). These

differences could lead to differences in the sensitivity of institutional investors to the distribution

of future value. Thus, I test for short-term preferences of institutions classified along these two

dimensions. First, I classify institutions based on the frequency of their trading to proxy for the

length of their investment horizon. Second, I classify institutions based on their legal form (e.g.

banks, pensions, etc.) to capture differences in fiduciary standards across types of institutions.

2.3.1 Classification based on investment horizon

A common explanation for why institutional investors have preferences for near-term

earnings over long-run value is that they have short expected investment horizons (Graves and

Waddock [1990], Porter [1992]). There is intense competition among some institutional

investors for client funds to invest. Such competition engenders a quest for good portfolio

performance in the short-run (Graves and Waddock [1990]).1 This quest for short-term

performance leads to the adoption of more aggressive trading strategies (such as market timing

and technical analysis) at the expense of buy-and-hold investment strategies based on firm

fundamentals.2 Lowenstein [1988] argues that, "by encouraging an emphasis on trading rather

than investing, they [institutional investors] focus the intelligence and energies of the investment

community on short-term developments" (p. 64). This claim is reinforced by survey evidence

that found that 55% of the institutional investors surveyed would sell a stock based solely on a

1 Even if institutions have long-term investment goals, the vast majority of firm performance benchmarks are short-
term oriented (e.g. quarterly earnings reports, monthly sales figures). These short-run firm performance measures
naturally lead to the evaluation of fund managers over the same horizon, creating incentives for a short investment
horizon (O'Barr and Conley [1992]).
2 In support of this idea, Froot et al. [1992] model an equilibrium where, if speculators have short investment
horizons, they will herd on the same short-term information, even if it is unrelated to firm value.

6
report of bad news about current or near-term performance in the Wall Street Journal (Pound and

Shiller [1987]). Thus, short-term investment horizons of institutions, and the desire to try to earn

trading profits based on near-term earnings, could translate into a preference for firms for which

near-term earnings have a larger valuation impact.

To test for this effect, I classify institutions into groups based on their expected

investment horizon. I use the classification method developed by Bushee [1998], who separates

institutions into three groups based on their past portfolio management behavior. The first

group of institutions, called “transient institutions,” are characterized as having high portfolio

turnover and highly diversified portfolio holdings. These characteristics reflect the fact that

transient institutions tend to be short-term-focused investors whose interest in the firm’s stock is

based on the likelihood of short-term returns rather than long-term capital appreciation or

dividends (Porter [1992]). As such, transient institutions are the group of investors argued to

create incentives for managerial myopia due to the fact that a near-term earnings disappointment

could trigger large-scale selling by such institutions and temporarily depress the firm’s stock

price (Porter [1992], Jacobs [1991]). In support of this argument, Bushee [1998] finds that

managers are more likely to cut R&D expenditures to meet current earnings targets if their firm’s

ownership is dominated by transient institutions.

The other two types of institutions classified by Bushee [1998], “quasi-indexers” and

“dedicated,” provide long-term, stable ownership in firms as they are geared toward longer-term

dividend income or capital appreciation. Dedicated institutions are characterized by large

average investments in portfolio firms and extremely low turnover, consistent with a

“relationship investing” role and a commitment to provide long-term patient capital (Porter

[1992], Dobrzynski [1993]). Quasi-indexers are also characterized by low turnover, but they

7
tend to have diversified holdings, consistent with a passive, buy-and-hold strategy of investing

portfolio funds in a broad set of firms (Porter [1992]). Because of the longer investment

horizons of these two types of institutions, they should be less focused on near-term earnings and

be more likely to have preferences that are insensitive to the distribution of future value.

If the institutions with short investment horizons (transient institutions) are more focused

on near-term earnings because their information gathering is attuned to near-term news, and if

firms with a higher percentage of value in near-term earnings provide more profit opportunities

due to the larger expected valuation impacts of short-term news, then the following hypothesis

should be supported:

Hypothesis 1a: The level of institutional holdings by transient institutions will be positively
(negatively) associated with the proportion of firm value in near-term earnings (long-run
value).

The absence of a short investment horizon does not imply that such institutions will favor longer-

term value, or will not still favor near-term value. Thus, the tests for dedicated and quasi-indexer

institutions should be viewed as descriptive and as a benchmark to test whether investment

horizon lengths are a determinant of institutional investor preferences for near-term earnings.

2.3.2 Classification based on fiduciary standards

A second explanation for the alleged short-term focus of institutions is that many

institutions have a fiduciary duty to prudently invest funds on behalf of their clients. While

diversification may seem prudent according to modern portfolio theory, many courts have made

rulings consistent with the idea that each stock must be evaluated individually as to its merits

(Badrinath, Gay, and Kale [1989]). Current earnings performance of portfolio firms is often

used by clients and the courts as an objective criteria to judge the prudence of an investment

(O'Barr and Conley [1992], Del Guercio [1996]. Thus, an institution may be sensitive to the

8
short-term earnings performance of each stock in its portfolio. Firms with a large proportion of

their value contained in near-term earnings, which are forecasted by analysts, may appear as

safer investments than firms whose market value is predominantly composed of more uncertain

long-term expectations of growth.

To test for the impact of fiduciary restrictions, I split institutions into four groups based

on their legal form: bank trusts, insurance companies, investment advisors (including mutual

fund companies), and pensions and endowments. Prior research finds that this classification

highlights significant differences across institutions in preferences for current earnings news and

for certain firm characteristics like size and growth potential (Del Guercio [1996], Lang and

McNichols [1997], Abarbanell, Bushee, and Raedy [1998]). Banks manage equities on the

behalf of individuals and other institutions through their trust departments. They face strict

fiduciary requirements that cause them to avoid stocks which courts would view as imprudent

(Badrinath, Gay and Kale [1989], Del Guercio [1996]). Pensions and endowments consist of

corporate (private) pensions, public pensions, and the endowments of universities and

foundations. This group of institutions also faces fairly strict fiduciary responsibilities, though

the prudent person standard has not been as strictly enforced on pensions as it has on bank trusts

(O’Barr and Conley [1992], Del Guercio [1996]).

Insurance companies hold equities as an investment vehicle for their premiums and

manage some private pension funds. In contrast to banks and pensions, these institutions are

subject to less restrictive fiduciary constraints. Investment companies and advisors (hereafter

investment advisors) manage individual investments through mutual funds and serve as external

fund managers for pensions and endowments. Investment advisors are chosen as investment

vehicles because they promise short-term liquidity; clients can generally withdraw their funds on

9
demand. Historically, investment advisors have been held to the least restrictive fiduciary

responsibilities of any type of institution (Del Guercio [1996]).

Based on the above differences, preferences for near-term earnings are most likely to be

manifested in those institutions that face the most restrictive fiduciary standards. Firms with a

higher percentage of value expected to be realized in near-term, forecasted earnings will likely

be viewed as safer investments than firms whose stock price mainly consists of expectations of

value arising in distant periods. If differences in fiduciary restrictions are binding constraints on

institutions’ investment patterns and if firms with less value in long-term earnings are viewed as

more prudent, the following hypothesis should be supported:

Hypothesis 1b: The level of institutional holdings by banks and pensions will be positively
(negatively) associated with the proportion of firm value in near-term earnings (long-run
value).

Again, the tests for insurance companies and investment advisers should be viewed as

descriptive and as a benchmark to test whether fiduciary standards are a determinant of

institutional investor preferences for near-term earnings.

2.2 Do Institutional Investors Cause Stocks to be Myopically Priced?

While the above test provides evidence on the implicit investment preferences of

institutional investors, it does not necessarily imply that these preferences should influence the

investment horizons of corporate managers. For instance, O'Barr and Conley [1992] argue that

most institutions take little interest in corporate governance; thus, short-sighted institutions

would be more likely to sell out rather than try to influence the manager's investment pattern. To

link institutional myopia to managerial myopia, critics have claimed that institutions not only

prefer near-term earnings, but pay too much to get them (Lowenstein [1988]). In other words,

the desire of institutions to hold firms with good expected near-term performance may cause a

10
firm's stock to be myopically priced, with near-term earnings overvalued and long-term earnings

undervalued. Such mispricing could then lead current-price-maximizing managers to shift their

investment horizon to a more short-term focus. Therefore, in my next set of tests, I examine

whether some institutions cause firms to be myopically priced.

Prior research has again found limited evidence supporting the allegation that short-term

preferences of institutional investors lead to mispricing. Using a similar breakdown of firm

value into book value, near-term abnormal earnings, and long-run (terminal) value components,

AB tests whether firms in the US stock market are myopically priced. They find that, on

average, near-term earnings are not overvalued, but correctly priced. They also find that an

apparent undervaluation of the terminal value is really measurement error, and that this portion

of firm value is also likely correctly priced. However, their study groups together all firms,

including those with little or no institutional ownership. Both Eames [1998] and Rajgopal and

Venkatachalam [1998] run earnings response coefficient tests conditioning on the level of

institutional ownership. Neither study finds evidence consistent with myopic mispricing by

institutional investors. However, this result is not surprising given that they both find no

evidence that institutional investors as a whole have preferences for short-term earnings. If only

certain types of institutions exhibit short-term preferences, as predicted by hypotheses 1a and 1b,

then a more powerful test of myopic mispricing is to focus on ownership by these types. If the

preferences of such institutions for the timing of future earnings cause systematic deviations of

price from intrinsic values, the following hypotheses will be supported:

Hypothesis 2a: For firms with high levels of institutional ownership by transient institutions,
the proportion of value in near-term earnings (long-run value) will be over- (under-) valued.

Hypothesis 2b: For firms with high levels of institutional ownership by banks or pensions,
the proportion of value in near-term earnings (long-run value) will be over- (under-) valued.

11
III. Methodology

3.1 Tests for Institutional Investor Preferences over the Timing of Future Earnings

The first step in developing the empirical tests is to separate firm value into components

based on when the value is expected to be realized through the accounting system. The model

used here is based on the AB empirical adaptation of the Ohlson [1995] valuation model.

Ohlson [1995] shows that by assuming clean surplus accounting—the change in book

value is equal to earnings minus net dividends—the value of the firm (Pt) can be written in terms

of accounting book value (bt) and earnings (xt), with r representing the cost of capital:3

∞
Pt = b t + ∑ (1 + r ) E t [x t +τ − r ⋅ b t +τ −1 ]
−τ
(1)
τ =1

From equation (1), AB note that the expected price-to-book premium at an arbitrary future

horizon T is:

∞
E t [Pt + T − b t + T ] = ∑ (1 + r ) E t [x t +τ − r ⋅ b t +τ −1 ]
−τ
(2)
τ =T

The Value Line database provides forecasts of earnings, book values, and price-earnings ratios

for up to four years ahead. Because point forecasts of earnings are not available beyond that

horizon, I use four years as the point to demarcate the near-term from the long-term.4

Substituting (2) into (1) at T = 4 yields the following expression, which segregates firm value in

three components based on when it will be realized through the accounting system as earnings:

4
Pt = b t + ∑ (1 + r ) E t [x t +τ − r ⋅ b t +τ −1 ] + (1 + r ) E t [Pt + 4 − b t + 4 ]
−τ −4

τ =1
(3)
= BVt + PVAX t + PVTVt

3 This relation is also based on the following assumptions: price is equal to the present value of all future dividends,
there is risk neutral pricing, and there is a constant and nonstochastic term structure of interest rates.

12
The first component of (3), BV, represents that portion of firm value that has already been

captured by the accounting system. The second component of (3), PVAX, is the present value of

abnormal earnings over the next four years. This component captures the part of firm value that

will be realized through accounting earnings in the near-term. The final component of (3),

PVTV, is the present value of the forecasted terminal value four years hence. The terminal value

represents all future earnings occurring beyond the four-year horizon, and thus represents that

component of firm value that will take the longest to flow through the accounting system.

I calculate the variables BV, PVAX, and PVTV using forecast data from Value Line to

proxy for market expectations, with firm-specific estimates of discount rates.5 To test for

institutional investor preferences for the distribution of value, I divide these variables by price to

obtain the proportion of firm value in each of the three components and perform the following

regression:

PIH t = γ 0 + γ 1 (BVt / Pt ) + γ 2 (PVAX t / Pt ) + γ 3 (PVTVt / Pt ) + ε t

(4)
= γ 0 + γ 1 BVC t + γ 2 AXC t + γ 3 TVC t + ε t

where PIH is the percentage of institutional ownership and BVC, AXC, and TVC represent the

price-deflated values of BV, PVAX, and PVTV, respectively. If institutions exhibit no

preferences over when value is realized through the accounting system and instead choose their

level of ownership based on other factors (such as stock returns, stock ratings, etc.), the

coefficients on AXC and TVC should not be different from zero. If institutions prefer value to

4 Depending on the degree of institutional investor myopia, four years might be too long to accurately measure the
“near-term.” To explore this possibility, I also run all of the tests defining the near-term to be one year ahead.
These results are discussed in Section V.
5 Prior research has used ex post realizations (Penman and Sougiannis [1998]) and time-series forecasts from
historical data (Frankel and Lee [1998]) to calculate implicit value using the Ohlson model. The advantages of the
Value Line data are that it provides an ex ante expectation and that it is not subject to the intertemporal
inconsistency problem identified by Myers [1999]. Also, Value Line provides forecasts of earnings, dividends, and
book values that are consistent with clean surplus in over 90% of the observations. The disadvantage of Value Line
data is that it represents only one analyst’s expectations and that it exhibits the optimistic bias typically found in
analyst forecast data.

13
be realized through the accounting system in near-term earnings rather than in long-term

earnings, the test should yield the following estimated coefficients:

H1A : γ 2 > 0, γ 3 < 0 (Hypothesis 1)6

I make no formal hypotheses concerning the coefficient on BVC since the myopia arguments

deal with the trade-off between near- and long-term expected earnings, and not the total amount

of unrecorded goodwill a firm has (i.e. whether it is a value firm or a growth firm).

An important drawback to estimating equation (4) as stated is that it is susceptible to a

correlated omitted variables problem. Prior research shows that institutions choose their level of

ownership based on other factors such as size, growth, performance, risk, stock ratings, and

liquidity, all of which are likely correlated with the distribution of firm value. To address this

problem, I include a number of control variables to capture these relations.

I include firm size (SIZE), measured as the log of market value of equity, to control for

institutions’ preferences for large firms. Institutions prefer large firms due to concerns over

prudent person standards, the desire for liquidity, and the presence of lower information

asymmetries (Del Guercio [1996], Gompers and Metrick [1998]). Related to this variable, I

explicitly control for the firm’s S&P stock rating (RATE) and number of years the firm has been

listed (TIME), both of which could be important measures of the prudence of an investment

(Badrinath, Gay, and Kale [1989], Del Guercio [1996]). I also directly control for the firm’s

liquidity (LIQ), measured as the average trading volume in the firm’s stock divided by the

average shares outstanding (Badrinath, Gay, and Kale [1989], Del Guercio [1996], Falkenstein

[1996], Gompers and Metrick [1998]). Next, I add an indicator variable for whether a firm is

listed on the Standard & Poor's (S&P) 500. This variable is positively associated with

14
institutional holdings due to the fact that many institutions index some portion of their equity

holdings (Del Guercio [1996], Gompers and Metrick [1998]). Institutions have also been shown

to have preferences for firms that pay dividends, so I include the firm’s dividend yield (YIELD),

measured as the ratio of dividends to price (Badrinath, Gay, and Kale [1989], Del Guercio

[1996], Falkenstein [1996], Gompers and Metrick [1998]).

I include three variables to proxy for the riskiness of the firm. Systematic risk is proxied

by the firm’s market-model beta (BETA), total risk is proxied by the standard deviation of

returns (STD), and risk of losses in case of bankruptcy is proxied by the firm’s leverage ratio

(LEV), which is measured as the ratio of debt to assets. Prior research finds that institutions

generally prefer firms with high BETA, but low STD and LEV (Badrinath, Gay, and Kale

[1989], Falkenstein [1996]). The firm’s market-adjusted returns (MAR) over the past year are

included to control for recent market performance, which has been shown to be positively

associated with institutional holdings (O'Brien and Bhushan [1990], Falkenstein [1996], Lang

and McNichols [1997], Gompers and Metrick [1998]). To proxy for preferences for growth

firms, I include the firm’s average sales growth (SGR) over the prior three years. This variable

has not been examined by prior research, but is important to include to ensure that the firm value

components are not proxying for recent growth. Finally, I include the firm’s R&D intensity

(R&D), measured as the ratio of R&D expense to sales. Prior research has tested for institutional

myopia using this variable, generally finding that institutional ownership is positively associated

with R&D spending (Baysinger et al [1991], Wahal and McConnell [1998]).

After including all of the control variables, the final empirical specification of the test is

as follows:

6 If the Value Line forecasts serve as poor proxies for market expectations, then the resultant errors-in-variables
problem will bias the coefficients towards zero. Thus, the presence of measurement error in the forecasts works

15
PIH t = γ 0 + γ 1 BVC t + γ 2 AXC t + γ 3 TVC t + γ 4SIZE t + γ 5 LEVt + γ 6 SP500 t + γ 7 MAR t +
γ 8 BETA t + γ 9 STD t + γ 10 LIQ t + γ 11 YIELD t + γ 12 R & D t + γ 13 TIME t + (5)
γ 14 RATE t + γ 15 SGR t + ε t

To test for differences in myopia across types of institutions, I replace PIH in equation (5)

with the percent holdings by each group of institution, denoted as DED (dedicated), QIX (quasi-

indexer), TRA (transient), BNK (banks), INS (insurance companies), IA (investment advisers),

and P&E (pensions and endowments).

3.2 Tests for Myopic Pricing

3.2.1 Price level test

The next set of tests examines whether institutional preferences for the distribution of

future earnings translate into the mispricing of stocks. If there is heavy demand by certain

institutions for firms with a high (low) proportion of value in near-term earnings (long-run

value), such institutions may place too much weight on near-term earnings and too little weight

on long-term earnings in valuing the firm. I test for these effects using the methodology of AB,

who test whether the US stock market, as a whole, exhibits myopic mispricing.

Based on equation (3), AB test for myopic pricing with the following regression:

Pt = α 0 + α 1 BVt + α 2 PVAX t + α 3 PVTVt + η t (6)

Because each component is discounted to present value, an extra dollar of PVAX or PVTV

should increase price by a dollar, indicating an expected coefficient of one on each of the

regressors. Also, as indicated by equation (3), the intercept should be zero because value is

completely explained by the three value components. AB report estimated coefficients that are

not significantly different from one for both BV and PVAX, and a coefficient significantly less

against finding results in support the myopia hypothesis.

16
than one on PVTV. These results only partially support myopic mispricing for the market as a

whole.7

To test whether mispricing is concentrated in firms with high levels of short-sighted

institutional investors, I interact the variables in equation (6) with an indicator variable (DPIH)

for high levels of institutional ownership. I define the indicator variable DPIH to be equal to one

if the firm’s institutional ownership of a given type is in the top decile of PIH for all firms during

the year and zero otherwise (with PIH replaced by the variables for ownership by each group of

institutions identified earlier).8 This approach produces the following model:

Pt = α 0 + α1 DPIHt + α 2 BVt + α 3 (BV * DPIH) t + α 4 PVAXt + α 5 (PVAX * DPIH) t +

(7)
α 6 PVTVt + α 7 (PVTV * DPIH) t + η jt

In this model, the null hypothesis of efficient pricing would be:

H 2 0 : α 0 = α 1 = 0, α 2 = α 4 = α 6 = 1, α 3 = α 5 = α 7 = 0 (Null hypothesis of no mispricing)

The alternative hypothesis that high levels of institutional ownership cause firms to be priced

myopically relative to the theoretical weighting is:

H 2 A : α 4 + α 5 > 1, α 6 + α 7 < 1 (Hypothesis 2)

Thus, if firms with high institutional ownership of a given type are mispriced, this hypothesis

requires that 1) the coefficient on the interaction term be significantly different from zero and 2)

the sum of the two coefficients on each variable be significantly different from one.

3.2.2 Future returns test

As AB discuss, measurement error in the proxies for market expectations of future value

or for the discount rate would bias the coefficients away from one and give the appearance of

7 AB perform future return tests which indicate that the possible mispricing is actually measurement error. These
tests are discussed in the next section.

17
improper weighting by the market. To determine whether measurement error or mispricing is

driving the above results, AB implement a future returns test. If an apparent mispricing is due to

myopic preferences, then the mispricing should be reversed as the future earnings become

realized, generating predictable future abnormal returns. However, if the apparent mispricing is

solely due to measurement error, then no future abnormal returns should be observed. Because

the potential mispricing pertains to earnings forecasts as much as four years in the future, I

examine abnormal returns for up to five years into the future.

To perform the future returns test, I adopt a “Fama and McBeth” methodology similar to

the approach used by Abarbanell and Bushee [1998]. This approach involves first calculating

scaled decile ranks for each value component (denoted RBVC, RAXC, and RTVC).9 The scaled

decile rank is computed by forming deciles of the distribution of each independent variable in

each year (after all of the forecasts are released to the public), and then dividing the decile rank

by nine so that the scaled decile rank ranges between zero and one. To test for institutional

influence on mispricing, each value component variable is interacted with the decile of

institutional ownership (RPIH) to produce a scaled rank variable that represents a strategy that

takes long (short) positions in firms with high (low) value component values and high (low)

levels of institutional ownership.10 This approach produces the following regression:

CAR (I) t = β 0 + β 1 RBVC t + β 2 (RBVC * RPIH) t + β 3 RAXC t + β 4 (RAXC * RPIH) t

+ β 5 RTVC t + β 6 (RTVC * RPIH) t + β 7 RSIZE t + β 8 RBETA t + β 9 REPt + ξ jt (8)

8 I chose deciles to ensure that firms in the highest group had substantially high institutional ownership of each
type. I re-ran all of the tests using quintiles, and the results were similar, but less significant. Thus, the decile
approach is necessary to get sufficient power to detect the effect of institutional ownership on pricing.
9 Because returns are the dependent variable, BV, PVAX, and PVTV are deflated by beginning price, yielding the
BVC, AXC, and TVC variables used in the institutional holdings test.
10 To compute this scaled rank variable, the decile of the value component (1,10) is multiplied by the decile of
institutional ownership (1,10) to obtain a value between 1 and 100. Then, this value is rescaled to range between 0
and 99, and finally divided by 99 to get a variable that ranges between 0 and 1.

18
where CAR(I) are the buy-and-hold size-adjusted abnormal returns cumulated from the seventh

month after the fiscal year end to the same time I years later, I = 1, 2, 3, 4, and 5. The decile

ranks of size (RSIZE), beta (RBETA), and the earnings-price ratio (REP) are included to capture

any return impacts due to factors identified by Fama and French [1992].11 An individual

coefficient in this specification represents the abnormal return to a zero-investment portfolio

optimally formed to exploit the information in the associated independent variable that is

orthogonal to the information in the other variables (Abarbanell and Bushee [1998]). If

institutional myopia leads to mispricing, the coefficient on RAXC*RPIH (RTVC*RPIH) should

be significantly less (greater) than zero over some horizon as the mispricing reverses itself. To

test for myopic pricing by the various groups of institutions, I replace RPIH in equation (8) with

ownership variables for each of the groups of institutions identified earlier.

IV. Sample and Descriptive Statistics

4.1 Sample

The sample includes all firm-years between 1980 and 1992 with available data on Value

Line, Spectrum, Compustat, and CRSP. The final sample consists of 10,380 firm-years, with

673-973 observations per year.

The forecasts of future earnings, book values, and prices are obtained from the University

of Michigan Value Line database, which contains electronic versions of Value Line reports for

the years 1978-92. Using the Value Line report issued during the third quarter of a firm's fiscal

year, forecasts are available for the next fiscal year, the year after, and a long-range forecast

labeled "three-to-five years" ahead. Following AB, these three-to-five year forecasts are

assumed to be forecasts for four-years ahead. A three-year-ahead forecast is also required by the

11 The other main Fama-French factor is book-to-market, which is captured in the BVC variable.

19
model, and is obtained by interpolating between the two-year-ahead and four-year-ahead

forecasts. The forecast of long-run (terminal) value is calculated by multiplying the long-range

P/E forecast by the long-range earnings forecast to obtain a predicted price. The forecasted

terminal value is the difference between this price and the long-range forecast of book value.

Historical book values and many of the control variables are obtained from the 1997

Compustat Annual Files. The price at the end of the firm’s second quarter, cumulative size-

adjusted abnormal returns, and data for some of the control variables are collected from the 1997

CRSP Daily Return Files. The price at the end of the second quarter is used to roughly

correspond with the date of the Value Line forecast. Buy-and-hold size-adjusted returns are

calculated as the difference between the cumulative raw returns of the firm over a given horizon

and the contemporaneous return on an equally-weighted size decile control portfolio.

The firm-specific discount rate used to calculate the present values of future earnings and

terminal value is calculated using the CAPM with firm-specific betas and an assumed risk

premium over the risk-free rate of 8% (AB).12

The institutional investor holdings data are obtained from the Harvard Business School

Spectrum database, which contains all 13-f filings between 1980 and 1997. According to SEC

Rule 13f-1, all institutions managing more than $100,000,000 in holdings must file a 13-f with

the SEC at the end of every calendar quarter. The 13-f must report all equity holdings greater

than 10,000 shares or $200,000 in market value. Thus, the data used in this study reflect end-of-

calendar-quarter holdings for those fund managers filing 13-f's. The holdings data are collected

as of the end of the third calendar quarter, which is the first holdings date available after the

release of the Value Line forecasts.

12I also estimated the variables using a 6% risk premium and using constant discount rates of 11%-15%. There
were no qualitative differences in results under these alternative approaches.

20
 Institutions are classified into the three groups using a factor and cluster analysis

approach described in Bushee [1998].13 Panel A of table 1 describes the mean portfolio

characteristics (in terms of standardized factor scores) of the three types of institutional investors.

Transient institutions (TRA) have high portfolio turnover (high PTURN factor) and diversified

portfolios (low BLOCK factor), as well as preferences for smaller firms (low FSIZE factor).

Dedicated institutions (DED) have low turnover and more concentrated portfolio holdings (high

BLOCK factor), and also tend to prefer smaller firms. The quasi-indexer institutions have low

turnover and diversified holdings, and tend to hold larger firms (consistent with many index

strategies). The proportion of institution-years in each group is roughly similar to that reported

in Bushee [1998] over a different sample period.

Institutions are classified into types based on the classification provided on the Spectrum

database. Spectrum identifies five classes on institutions: banks, insurance companies,

investment companies, independent investment advisers, and “other”, which includes internally-

managed public and private pension funds, colleges and universities, foundations, and other

miscellaneous institutions (e.g. law firms, private citizens acting as institutions, etc.). I use the

bank (BNK) and insurance companies (INS) categories as reported. I combine the investment

companies and independent investment advisors into one category called “investment advisors”

(IA) because the two Spectrum categories are very similar in their fiduciary standards and fund

sponsors. Finally, I drop an institution that is not clearly a pension, university, or foundation

endowment to form the final group, pensions and endowments (P&E). Panel B of table 2 shows

13 This approach starts with a large number of variables that have been used by prior research to describe
institutional investor trading behavior and portfolio characteristics. To account for the high degree of
multicollinearity among these variables, principal factor analysis is used to generate a small number of common
factors that explain the shared variance among the original variables. Institutions are then classified into groups
using k-means cluster analysis on the factor scores.

21
a cross-classification of institutional groups. There is a significant amount of heterogeneity

across the two classification methods, so one method is not a proxy for the other.

4.2 Descriptive Statistics

Table 2 presents descriptive statistics for the value component variables, the control

variables, and the institutional ownership variables. The table indicates that the near-term

earnings component (AXC) is a relatively small component of firm value for most firms. The

majority of the average firm’s value is concentrated in book value or terminal value. In fact,

AXC is negative on average, indicating that many firms in the sample have negative expected

abnormal earnings in the near-term (note that this does not mean they have negative expected

earnings). Summing the median levels of BVC, AXC, and TVC yields a value of 1.04, which

indicates that Value Line analysts are slightly more optimistic than the market’s expectation.

Table 2 also indicates that the sample firms tend to be larger than the population of firms,

which is not surprising given the constraint of Value Line following. About 36% of the firm-

years were listed on the S&P 500, and the average time listed is 18 years, indicating a sample of

rather mature firms. The mean level of institutional holdings over the sample period is 36%, of

which the largest portion is held by pensions and endowments (12%). Investment advisers have

the next largest holdings (9.6%), followed by banks (8%), and insurance companies (3.7%). The

classification of institutions by portfolio management characteristics indicates that the majority

of holdings are by quasi-indexer institutions (20%).

Table 3 reports Pearson and Spearman correlations among the variables used in the

empirical tests. There is a high negative correlation between the percent of value already

recorded by the accounting system (BVC) and the percent to come in the future (AXC and

TVC). However, there is not a trade-off between near-term and long-term earnings, indicated by

22
the significant positive correlation between AXC and TVC. Thus, tests of myopic preferences

using short-term earnings alone would miss this correlation with future value. Almost all of the

institutional holdings variables are significantly positively correlated with each other. Thus,

there is no evidence that low ownership by one type of institution is systematically offset by

higher ownership by another type. The univariate evidence on the relationship between the

levels of institutional ownership and the amount of firm value in a given component indicates, in

general, a negative correlation with the book value component and a positive correlation with the

near- and long-term earnings components. However, because the value components are

correlated with the many of control variables, the effect of the value components per se on

institutional ownership is difficult to discern without a multiple regression analysis.

Table 3 also indicates that many of the univariate correlations are substantial in

magnitude, indicating the multicollinearity may be a problem in the sample. To test this

possibility, I performed variance inflation factor (VIF) analyses on each yearly regression in each

of the empirical tests. VIF’s are based on the R2 from regressing each independent variable on

all other independent variables. A VIF of one indicates no multicollinearity and a VIF in excess

of 10 indicates harmful multicollinearity (Kennedy [1992]). The highest VIF encountered was

5.7, which while high is far below the cutoff for harmful multicollinearity. I also performed

principal factor analysis on the control variables to account for the multicollinearity and reduce

the set of variables to two linear combinations (a “size” factor and a “risk” factor) that explain

most of the shared variance. Including these factors in the regression in lieu of the individual

variables produces coefficients on the value components that are similar in magnitude but more

strongly significant.

23
V. Results

5.1 Evidence on Institutional Investor Preferences for the Timing of Future Earnings

Panel A of table 4 provides results of the regression of institutional ownership on the

three components of firm value and the control variables (equation (4)). To mitigate the problem

of cross-sectional correlation inherent in a pooled cross-sectional regression (Bernard [1987]),

regressions are run for each individual year, and the mean coefficient across years is reported.14

Because the dependent variable is a levels variable, an adjustment for serial correlation in the

yearly coefficients is made in calculating the standard errors for the mean coefficients (AB).

Column 1 provides results for total institutional ownership (TIH), which allows a comparison to

prior research that has looked only at the preferences of institutions as a whole. Ceteris paribus,

institutions as a whole prefer firms with a higher proportion of value in unrecorded goodwill (i.e.

“growth” firms), as indicated by the negative coefficient on BVC. The mean coefficient on the

near-term earnings component (AXC) is positive and the mean coefficient on the long-term

earnings coefficient (TVC) is negative. These findings are consistent with institutional investors

as a whole having preferences for more value in near-term earnings than in long-run value, but

neither coefficient is significant. Thus, the assertion that all institutions are short-sighted is not

supported by the data.

Columns 2-4 of table 4 provide results for institutional ownership classified by

investment horizon. Transient investors (TRA) significantly prefer firms with more value in

near-term earnings (AXC) and with less value in long-term earnings (TVC). Both results are

consistent across years, as the coefficient on AXC (TVC) is positive (negative) in 10 (11) of 13

years (not reported). Thus, transient institutions exhibit preferences consistent with institutional

24
investor myopia, supporting Porter’s [1992] view that this type of investor is most likely to

create pressure for strong short-term earnings performance (hypothesis 1a). Transient investors

also significantly prefer firms with less value in book value, and their preferences drive the

observed results for overall institutional ownership. Dedicated (DED) and quasi-indexer (QIX)

institutions exhibit no significant preferences for the distribution of a firm’s earnings other than a

preference by dedicated institutions for firms with less value in the terminal value component.

Columns 5-8 of table 4 provide results for institutional ownership classified by the

fiduciary standards of the institution. The results generally support hypothesis 1b that fiduciary

standards impact institutional preferences for a firm’s distribution of value. Banks (BNK),

which face the most stringent fiduciary standards, exhibit a significant preference for near-term

earnings and a significant dislike of the long-term earnings component. This result is also

consistent across years, having the same sign in 11 of 13 years for both AXC and TVC (not

reported). On the other hand, investment advisers (IA) and insurance companies (IC), which

face more lenient fiduciary standards, exhibit a significant preference for firms with less value in

near-term earnings. For pensions and endowments (P&E), none of the value component

variables are significant, indicating that other variables are more important in determining the

investment decisions of this type of institution.

The results for the control variables in table 4 indicate that there are many significant

determinants of institutional investor ownership other than the distribution of earnings. Thus, it

is unlikely that the value component variables are proxying for some other factor previously

shown to influence institutional investment. Notably, all types of institutional ownership (expect

banks) are significantly positively related to R&D intensity, a common metric for measuring

14 An analysis of the distribution of each of the independent variables revealed some outliers. As a result, all
observations in the extreme 1% tails of the distribution were windsorized. The results for the sample of raw data are

25
institutional investor myopia. Thus, confirming much of prior research, institutions do not seem

to be myopic with respect to R&D spending. Rather, certain types of institutions exhibit short-

term preferences for expected earnings performance.

5.1.1 Sensitivity analyses

To examine whether the results are sensitive to the definition of “near-term” (i.e. whether

four-years is too far ahead to capture short-term preferences), I recalculated AXC and TVC

based on a one-year ahead cut-off. I define AXC1 to be the present value of abnormal earnings

one-year ahead and TVC1 to be the present value of the terminal value after one year (this is

computed by moving the present value of abnormal earnings for years 2-4 into the TVC term).

Panel B of table 4 presents results for this redefinition of near-term earnings. For total

institutional ownership (column 1), the results are similar in sign to those in panel A, with larger,

though still insignificant, mean coefficients.

The results for the preferences of different groups of institutions mirror those in panel A,

with the coefficients generally larger and more significant. One notable change in results is that

the coefficient on TVC1 in the pension and endowment regression is significant at 0.05 level,

whereas the coefficient on TVC was insignificant. Thus, despite rather stringent fiduciary

responsibilities, pensions exhibit a propensity to invest in firms with a high proportion of future

value expected beyond the next year, possibly because such institutions tend to have long

investment horizons (see table 1). However, pensions also exhibit a weak preference for firms

with higher amounts of value in book value, so the amount of value in unrecorded goodwill for

firms held by pensions is likely not large. Overall, the results in panel B of table 4 indicate that,

when institutions exhibit myopic preferences, they are manifested through preferences for a

firms with a higher percentage of value in the next year’s earnings.

similar in significance, though the coefficients are smaller in magnitude.

26
 As an additional test of institutional sensitivity to the distribution of earnings, I regressed

three-year changes in institutional ownership on three-year changes in the value components and

in the control variables. Three-year changes were chosen because they exhibited more

dispersion in the changes in value components than one- and two-year changes. Table 5

presents results of this regression for both the four-year horizon (panel A) and the one-year

horizon (panel B). Changes in total institutional ownership are positively associated with

changes in the amount of value in near-term earnings, especially when the near-term is defined to

be one-year (CAXC1). This change is significantly driven by changes in both transient

ownership (CTRA) and in bank ownership (CBNK), confirming the results from the levels

regression. Changes in bank and transient institutional ownership are sensitive to changes in the

amount of value in terminal value, but only when terminal value is defined based on the four-

year horizon (CTVC). Thus, table 5 indicates that the observed preferences of banks and

transient institutions for near-term value is mostly focused on earnings in the next year and that

the dislike of long-term value by these two types is driven changes in value expected to occur

more than four years out.

5.2 Evidence on Myopic Pricing by Institutions

5.2.1 Price level tests

Table 6 presents results for the tests of whether institutions cause stocks to be myopically

priced. Again, I use a yearly regression approach with mean coefficients and p-values based on

adjusted standard errors reported in the table. Panel A presents results without institutional

ownership interactions, replicating the results in AB. The coefficients on BV and PVAX are not

significantly different from one, whereas the coefficient on PVTV is significantly less than one

for the four-year horizon (in this table, the first p-value tests whether the coefficient is different

27
from zero, the second tests whether it is different from one, which is the null hypothesis). For

the one-year horizon, the coefficient on PVAX is significantly greater than one, and the

coefficient on PVTV remains significantly less than one. These results are similar to those

reported by AB and are consistent with mispricing. However, in the future returns tests, AB

finds that these overall results are more consistent with a measurement error explanation (a result

confirmed later in this paper). Whether the differences are due to measurement error or

mispricing, these results serve as the benchmark for the subsequent tests that interact the value

component variables with indicators for high institutional ownership by type of institution.

Panel B of table 6 provides results of the price regression with interactions for high levels

of institutional ownership classified by investment horizon (equation (7)).15 The indicator

variables for high levels of ownership by both transient and quasi-indexer institutions are

significantly different from zero, indicating that the valuation model understates market value on

average for firms highly owned by these institutions. The coefficient on PVAX*DTRA

(PVTV*DTRA) is significantly greater (less) than zero, and the implied total coefficient is

significantly greater (less) than one, which supports hypothesis 2a that high levels of transient

investor ownership are associated with overvaluation of near-term earnings and undervaluation

of long-run value. The only other significant interaction in panel B is between PVAX and

DQIX, indicating that higher ownership by quasi-indexers is associated with an apparent

overvaluation of near-term earnings. A possible explanation for why the results for QIX parallel

those for TRA in this regression is that there is some time-series instability in the classification

scheme, such that some institutions (about 20% per year) move between the two categories over

time. This instability is due to the fact that the Spectrum data aggregates all funds within a fund

28
family and thus changes in the relative size of the various funds in a fund family can cause its

classification to switch between groups.

Panel C of table 6 presents results for the classification of institutions by fiduciary

standards. The interactions between the indicator for high bank ownership (DBNK) and both

PVAX and PVTV are not significantly different from zero. The result does not support

hypothesis 2b that high levels of bank ownership lead to significant mispricing. The interaction

between PVAX and DIA is significantly different from zero in the one-year horizon regression,

which indicates a relation between investment advisor ownership and overweighting of near-

term earnings. Because the results in table 4 indicate a negative relation between IA ownership

and this component of value, this result is not consistent with demand-driven mispricing and

likely reflects some other unknown effect. The only other significant interaction in the panel is

between the indicator for high insurance ownership (DINS) and PVTV, which suggests that high

ownership by insurance companies lead to less underweighting of the terminal value (though the

implied total coefficient is still significantly less than one).

5.2.2 Future return tests

Table 7 reports results for the future returns test (equation (8)). This test provides

evidence on whether the price level tests in table 6 are likely driven by mispricing or by

measurement error in the implicit value variables. The table does not report intercepts, which are

always insignificant, or the RSIZE, RBETA, and REP variables, which are generally

significantly negative, insignificant, and weakly significantly positive, respectively. Panel A

presents results without institutional ownership interactions. The coefficients on RBVC are

generally positive and significant, indicating a significant book-to-market effect in the data that

15 I omit the results for institutions as a whole because the results in tables 4 and 5 indicate little evidence of short-
sighted preferences among institutions as a whole, and the mispricing tests find no significant evidence of

29
is consistent with prior research (Fama and French [1992]). Consistent with AB, the coefficients

on RAXC (RTVC) are positive (negative) and often significant. Note that these returns go in the

opposite direction of a myopic mispricing effect, which would lead to negative (positive) future

returns to the RAXC (RTVC) components. Thus, the deviations of the coefficients from

theoretical values reported for all firms in table 6 is likely a product of measurement error in the

calculation of value or some uncontrolled for risk factor. Whatever the cause, these results serve

as the benchmark for looking at differences in stocks largely held by institutional investors. In

the following tests, I control for the returns to these unconditional strategies in looking at the

returns to strategies that interact the value component with the level of institutional ownership.

Panel B of table 7 reports results for trading strategies based on interactions between

value components and the level of ownership by institutions classified by investment horizon.

The analogous panel in table 6 indicated that high levels of transient institutional ownership are

associated with a higher (lower) multiple on near-term earnings (long-run value) than expected,

suggesting potential misvaluation. Table 7 indicates that the coefficients on the RAXC*RTRA

variables are consistently negative, and the coefficient after two years is significantly less than

zero for both one-year and four-year horizons. These implied negative portfolio returns are

consistent with transient institutions mispricing near-term earnings, which supports hypothesis

2a. The coefficients on RTVC*RTRA are consistently positive and are significant in the two-to-

three year return period. These implied positive returns are consistent with transient institutions

undervaluing the long-run value component, again supporting hypothesis 2a. Thus, the results of

tables 4-7 indicate that transient institutions not only prefer firms with more (less) value in near-

term (long-term) earnings, but their ownership is associated with systematic mispricing of these

components.

mispricing based on high levels of overall institutional ownership.

30
 Panel D of table 7 presents results for interactions based on the fiduciary standards of the

institution. The results in table 6 indicated no misvaluation of future earnings based on high

levels of bank ownership, and the results in table 7 confirm that there are no abnormal future

returns produced by strategies based on the level of bank ownership. Thus, there is no evidence

to support hypothesis 2b. Overall, the results from tables 4-7 suggest that, while banks have

preferences for firms with higher (lower) proportions of value in near-term (long-term) earnings,

they do not push the market price away from implicit value to acquire ownership in such firms.

VI. Summary and Conclusions

The goal of this paper was to examine the common contention that institutional investors

are short-sighted in preferring more of a firm's value to be realized in near-term, rather than long-

term, earnings. Such preferences are to be expected if competitive pressures, prudent person

standards, and frequent performance evaluations all conspire to drive fund managers to search

for stocks which will produce solid earnings in the near-term, even at the expense of long-run

value. The results indicate that institutions as a whole exhibit only weak preferences for firms

with a higher proportion of value in near-term earnings and a smaller proportion in long-term

earnings. However, institutions that face the strictest fiduciary standards (banks) and have the

shortest investment horizons (transient institutions) exhibit strong preferences for near-term

earnings over long-run value. Thus, managers of firms with a high (low) percentage of value in

near-term (long-term) earnings and high levels of ownership by banks and transient institutions

likely face the strongest incentives to make myopic decisions to please their investor bases.

Given that banks and transient institutions exhibit myopic preferences for near-term

earnings, the paper next tests whether these institutions pay too much for near-term earnings and

31
too little for long-term value, causing stocks to be myopically priced. If such institutions drive

such myopic pricing, it is likely to be manifested in firms with a high percentage of ownership by

such institutions. For these firms, institutions are most likely to be the price setters, and

competition among institutions to own these firms (which presumably have a desired distribution

of future earnings) could cause misvaluation of future earnings. Although banks exhibit

preferences for near-term earnings over long-run value, these preferences do not translate into

significant mispricings. However, the results indicate that high levels of ownership by transient

institutions are associated with significant over- (under-) weighted of the near-term (long-term)

earnings component of value, and that significant future returns are observed on strategies that

exploit this finding. Thus, transient institutions not only exhibit strong preferences for more

value in the near-term, these preferences translate into significant misvaluations. This finding

supports the concerns that many managers have about the adverse effects of an ownership base

dominated by short-term-focused institutional investors.

32
 References

Abarbanell, J. and V. Bernard. 1998. Is the U.S. stock market myopic?. University of California-
Berkeley Working Paper.

Abarbanell, J., and B. Bushee. 1998. Abnormal returns to a fundamental analysis strategy.
Accounting Review 73 (January): 19-45.

Abarbanell, J., B. Bushee, and J. Raedy. 1998. The effects of institutional investor preferences on
ownership changes and stock prices around corporate spin-offs. Harvard Business
School Working Paper.

Badrinath, S., G. Gay, and J. Kale. 1989. Patterns of institutional investment, prudence, and the
managerial “safety-net” hypothesis. Journal of Risk and Insurance 56 (December): 605-
629.

Baysinger, B., R. Kosnik, and T. Turk. 1991. Effects of board and ownership structure on
corporate R&D strategy. Academy of Management Journal 34 (March): 205-14.

Basu, S. 1983. The relationship between earnings' yield, market value and return for NYSE
common stocks: further evidence. Journal of Financial Economics 12 (June): 129-157.

Bernard, V. 1987. Cross-sectional dependence and problems in inference in market-based

accounting research. Journal of Accounting Research 25 (Spring): 1-48.

Bushee, B., 1998. The influence of institutional investors on myopic R&D investment behavior.
Accounting Review 73 (July): 305-333.

Del Guercio, D. 1996. The distorting effect of the prudent man law of institutional equity
investments. Journal of Financial Economics 40: 31-62.

Dobrzynski, J. 1993. Relationship investing: A new shareholder is emerging--patient and

involved. Business Week 3309 (March 15): 68-75.

Drucker, P. 1986. A crisis of capitalism. Wall Street Journal (September 30): 32.

Eames, M. 1998. Institutional investor myopia, ownership, earnings, and returns. Santa Clara
University Working Paper.

Falkenstein, E., 1996. Preferences for stock characteristics as revealed by mutual fund portfolio
holdings. Journal of Finance 51 (March): 111-135.

Fama, E. F. and K. French. 1992. The cross-section of expected stock returns. Journal of
Finance 47 (June): 427-465.

Frankel, R. and C. Lee. 1998. Accounting valuation, market expectation, and cross-sectional
stock returns. Journal of Accounting and Economics 25 (3): 289-319.

33
Froot, K., D. Scharfstein, and J. Stein. 1992. Herd on the street: Information inefficiencies in a
market with short-term speculation. Journal of Finance 47 (September): 1461-1484.

Gompers, P. and Metrick, A., 1998. How are large institutions different from other investors?
Why do these differences matter? Harvard Business School Working Paper.

Graves, S., and S. Waddock. 1990. Institutional ownership and control: Implications for long-
term corporate strategy. Academy of Management Executive 4 (February): 75-83.

Hansen, G., and C. Hill. 1991. Are institutional investors myopic? A time-series study of four
technology-driven industries. Strategic Management Journal 12 (January): 1-16.

Jacobs, M. 1991. Short-Term America The Causes and Cures of Our Business Myopia. Boston,
MA: Harvard Business School Press.

Kennedy, P. 1992. A Guide to Econometrics, 3d ed. Cambridge, MA: The MIT Press.

Lang, M., and M. McNichols. 1997. Institutional trading and corporate performance. Stanford
University Working Paper.

Laverty, K. 1996. Economic “short-termism”: The debate, the unresolved issues, and the
implications for management practice and research. Academy of Management Review 21
(July): 825-60.

Lowenstein, L. 1988. What's Wrong With Wall Street: Short-term Gain and the Absentee
Shareholder: Reading, MA: Addison-Wesley.

Myers, J. 1999. Implementing residual income valuation with linear information dynamics.
Accounting Review 74 (January): 1-28.

Nussbaum, B. 1987. The changing role of the CEO. Business Week (October 23): 28.

O'Barr, W., and Conley, J., 1992. Fortune and folly: The wealth and power of institutional
investing. Business One Irwin, Homewood, IL.

O'Brien, P., and R. Bhushan. 1990. Analyst following and institutional ownership. Journal of
Accounting Research 28 (Supplement): 55-76.

Ohlson, J. 1995. Earnings, book values, and dividends in security valuation. Contemporary
Accounting Research 11 (Spring): 661-687.

Penman, S. and T. Sougiannis. 1998. A comparison of dividend, cash flow, and earnings
approaches to equity valuation. Contemporary Accounting Research 15 (Fall): 343-383.

Porter, M. 1992. Capital Choices: Changing the Way America Invests in Industry. Boston, MA:
Council on Competitiveness/ Harvard Business School.

Pound, J. and R. Shiller. 1987. Are institutional investors speculators? The Journal of Portfolio
Management (Spring): 46-52.

34
Rajgopal, S., and M. Venkatachalam. 1998. The role of institutional investors in corporate
governance: An empirical investigation. University of Washington Working Paper.

Wahal, S. and J. McConnell. 1998. Do institutional investors exacerbate managerial myopia?

Emory University Working Paper.

35
 TABLE 1
Portfolio Characteristics of Institutional Investor Groups
Panel A: Characteristics of Transient, Dedicated, and Quasi-indexer Institutions
Institutional Investor Groups1
Factor TRA DED QIX
2
PTURN Mean 1.472 -0.228 -0.442
Standard Dev. 0.819 0.691 0.488

BLOCK Mean -0.196 2.122 -0.292

Standard Dev. 0.428 1.349 0.361

FSIZE Mean -0.248 -0.739 0.243

Standard Dev. 0.894 1.104 0.858

ISIZE Mean 0.192 0.289 -0.102

Standard Dev. 0.906 0.961 0.930

N 3454 1785 10,696

where PTURN = Portfolio Turnover Factor. Combination of 1) level of portfolio turnover and 2) percent of
portfolio stocks held continuously for two years
BLOCK = Block Size Factor. Combination of 1) weighted average size of institutional holdings in
portfolio firms, 2) percent of portfolio held in large blocks (greater than 5% stakes),
and 3) portfolio concentration ratio (total equity / number of stocks)
FSIZE = Firm Size Preference Factor. Combination of 1) weighted average market value of equity
of firms held by institution, 2) weighted average time listed of firm in portfolio, 3)
percent of portfolio firms in S&P 500
ISIZE = Institutional Size Factor. Combination of 1) total equity holdings of institution and 2)
number of stocks in institutions’ portfolio
N= Number of institution-years in group

Panel B: Interaction between Institutional Investor Type and Investment Horizon

Insurance Investment Pensions &
Banks Companies Advisers Endowments Total
Dedicated 537 139 940 168 1,784
Quasi-indexer 2,863 748 5,855 1,224 10,690
Transient 300 268 2,620 265 3,453
Total 3,700 1,155 9,415 1,657 15,927
1
TRA = transient institutional investors, DED = dedicated institutional investors, and QIX = quasi-indexer
institutional investors. Institutions are classified into these groups using the factor and cluster analysis approach
described in Bushee (1998). First, prior research is used to calculate a number of variables that have been used to
describe institutional investor trading behavior. Then, principal factor analysis is used to combine these variables
into common factors that explain the shared variance among the original variables. Finally, a k-means cluster
analysis is run on the factor scores from PTURN and BLOCK to obtain the final separation of institutional investors
into groups (the ISIZE and FSIZE factors are not used in the cluster analysis but are reported for descriptive
purposes.
2
The numbers in the columns are factor scores for each of the listed factors. These scores are standardized to have a
mean of zero and a standard deviation of one across the whole distribution of institutional investors.

36
 TABLE 2
Descriptive Statistics
Variable Mean Median Std. Dev. 25th Pctl. 75th Pctl.
BVC 0.725 0.592 0.544 0.367 0.920
AXC -0.092 -0.012 0.299 -0.169 0.076
TVC 0.488 0.464 0.328 0.275 0.688
SIZE 6.100 6.006 1.583 4.939 7.175
LEV 0.239 0.227 0.159 0.123 0.331
SP500 0.355 0.000 0.479 0.000 1.000
MAR 0.003 -0.002 0.114 -0.038 0.021
BTA 1.202 1.164 0.496 0.877 1.475
STD 0.102 0.100 0.026 0.080 0.125
LIQ 0.031 0.024 0.024 0.016 0.037
YIELD 0.025 0.022 0.022 0.006 0.036
R&D 0.019 0.003 0.033 0.000 0.025
TIME 18.070 19.143 7.597 12.622 23.705
RATE 4.080 5.000 3.183 0.000 7.000
SGR 0.027 0.050 0.209 -0.059 0.129
TIH 0.358 0.381 0.230 0.174 0.540
BNK 0.080 0.058 0.081 0.015 0.118
INS 0.037 0.011 0.065 0.001 0.044
IA 0.096 0.028 0.134 0.002 0.143
P&E 0.124 0.068 0.141 0.002 0.210
DED 0.077 0.054 0.083 0.011 0.113
QIX 0.203 0.201 0.145 0.081 0.311
TRA 0.072 0.053 0.074 0.013 0.106

BVC = Book value per share (60/25) / Price (24)1

AXC = Present value of forecasted abnormal earnings over next four years/ Price
TVC = Present value of terminal value four-years ahead / Price
SIZE = Log of market value of equity (24*25)
LEV = Leverage, measured as debt-to-assets ((9+34)/6)
SP500 = 1 if firm listed on S&P 500, 0 otherwise
MAR = Market-adjusted returns over prior year
BTA = Market model beta estimated from up to 36 prior monthly returns
STD = Standard deviation of daily returns over prior year
LIQ = Liquidity, measured as average monthly volume divided by shares outstanding over prior year
YIELD = Dividend yield (21/24)
R&D = R&D intensity (46/12)
TIME = Time listed, in years
RATE = S&P common stock rating (9 = A+…0 = not rated)
SGR = Average sales growth over prior three years (12).
TIH = Total shares held by institutional investors divided by total shares outstanding
BNK/INS/IA/PNE = Percent of shares held by Banks / Insurance Companies / Investment Advisers / Pensions &
Endowments
DED/QIX/TRA = Percent of shares held by Dedicated / Quasi-indexer / Transient institutions
1
Compustat numbers are in parentheses.

37
 TABLE 3
Correlation Matrix1

BVC AXC TVC SIZE LEV SP500 MAR BTA STD LIQ YIELD R&D
2
BVC 1 -0.78 -0.20 -0.35 0.04 -0.06 -0.19 -0.02 0.06 -0.09 -0.04 -0.04
AXC -0.77 1 0.33 0.31 -0.07 0.05 0.14 -0.06 -0.12 0.07 0.04 0.01
TVC -0.45 0.51 1 0.02 0.06 -0.06 0.05 0.09 0.16 0.17 0.00 0.09
SIZE -0.42 0.38 0.10 1 -0.12 0.63 0.17 -0.11 -0.41 0.02 0.02 0.02
LEV 0.15 -0.12 -0.04 -0.12 1 -0.03 -0.09 0.05 0.18 0.01 0.11 -0.08
SP500 -0.06 0.08 -0.05 0.64 -0.02 1 -0.01 -0.09 -0.29 -0.01 0.05 0.00
MAR -0.41 0.41 0.11 0.26 -0.15 0.06 1 0.08 0.03 0.20 -0.01 0.02
BTA -0.04 -0.09 0.12 -0.08 0.05 -0.08 0.02 1 0.59 0.37 -0.03 0.14
STD 0.07 -0.18 0.12 -0.44 0.17 -0.31 -0.10 0.62 1 0.47 -0.05 0.10
LIQ -0.12 0.08 0.16 0.06 0.09 0.08 0.00 0.37 0.45 1 -0.02 0.21
YIELD 0.26 -0.12 -0.27 0.19 -0.06 0.25 -0.03 -0.31 -0.50 -0.35 1 -0.02
R&D -0.06 0.01 0.09 0.13 -0.20 0.14 0.00 0.08 0.00 0.16 -0.03 1
TIME 0.03 0.05 -0.18 0.32 0.05 0.42 -0.04 -0.18 -0.32 -0.08 0.27 0.09
RATE -0.20 0.25 0.02 0.51 -0.13 0.44 0.06 -0.19 -0.45 -0.11 0.24 0.10
SGR -0.21 0.21 0.13 0.19 -0.02 0.04 0.12 0.06 -0.01 0.13 -0.11 0.00
TIH -0.20 0.22 0.06 0.37 -0.12 0.25 0.06 0.02 -0.21 0.19 0.07 0.17
BNK 0.13 -0.12 -0.10 -0.19 -0.05 -0.12 -0.06 0.02 0.03 0.00 0.08 0.02
INS -0.35 0.31 0.18 0.19 -0.10 -0.03 0.11 0.11 0.05 0.22 -0.19 0.09
IA -0.27 0.30 0.09 0.20 -0.05 0.07 -0.02 0.01 -0.12 0.13 -0.10 0.09
PNE -0.06 0.06 0.00 0.40 -0.14 0.35 0.03 -0.04 -0.24 0.04 0.23 0.16
DED -0.06 0.10 0.01 0.12 -0.04 0.07 -0.10 -0.02 -0.10 0.07 0.02 0.08
QIX -0.19 0.22 0.07 0.41 -0.17 0.30 0.07 -0.04 -0.29 0.08 0.16 0.17
TRA -0.25 0.19 0.05 0.28 -0.09 0.16 0.17 0.11 -0.04 0.30 -0.05 0.16

38
 TABLE 3 (Continued)
Correlation Matrix

TIME RATE SGR TIH BNK INS IA PNE DED QIX TRA
BVC -0.01 -0.17 -0.13 -0.19 0.06 -0.21 -0.21 -0.05 -0.02 -0.18 -0.20
AXC 0.03 0.17 0.13 0.19 -0.03 0.16 0.20 0.06 0.06 0.19 0.15
TVC -0.16 -0.05 0.04 -0.01 -0.07 0.09 0.05 -0.06 -0.02 0.00 0.00
SIZE 0.30 0.49 0.17 0.35 -0.21 0.09 0.34 0.36 0.05 0.40 0.22
LEV 0.01 -0.12 0.02 -0.12 -0.02 -0.03 -0.03 -0.12 0.01 -0.16 -0.06
SP500 0.40 0.43 0.04 0.23 -0.14 -0.10 0.18 0.38 0.03 0.30 0.10
MAR -0.09 -0.02 0.08 0.09 -0.08 0.33 0.08 -0.05 -0.03 0.05 0.21
BTA -0.21 -0.19 0.03 0.01 0.02 0.17 0.00 -0.07 -0.01 -0.04 0.15
STD -0.31 -0.40 -0.01 -0.20 0.01 0.17 -0.17 -0.25 -0.07 -0.29 0.03
LIQ -0.23 -0.14 0.16 0.15 -0.03 0.37 0.14 -0.03 0.05 0.05 0.31
YIELD 0.06 0.01 -0.02 0.01 0.02 -0.03 -0.03 0.03 0.02 0.02 -0.03
R&D -0.06 -0.02 -0.01 0.04 -0.03 0.09 0.04 0.01 0.02 0.02 0.07
TIME 1 0.44 0.05 0.21 -0.01 -0.10 0.25 0.18 0.11 0.26 0.02
RATE 0.40 1 0.15 0.30 -0.09 -0.01 0.27 0.32 0.11 0.36 0.07
SGR 0.04 0.19 1 0.11 -0.10 0.12 0.11 0.08 0.03 0.10 0.12
TIH 0.24 0.29 0.12 1 0.42 0.46 0.58 0.57 0.62 0.87 0.63
BNK -0.01 -0.07 -0.08 0.49 1 0.03 -0.12 0.20 0.44 0.26 0.29
INS 0.03 0.10 0.15 0.64 0.33 1 0.37 -0.07 0.33 0.27 0.47
IA 0.22 0.22 0.14 0.67 0.18 0.64 1 -0.07 0.34 0.56 0.32
PNE 0.20 0.34 0.12 0.67 0.42 0.33 0.27 1 0.27 0.58 0.30
DED 0.15 0.15 0.05 0.73 0.53 0.54 0.56 0.48 1 0.32 0.17
QIX 0.27 0.36 0.12 0.88 0.41 0.55 0.62 0.69 0.52 1 0.39
TRA 0.10 0.12 0.13 0.73 0.48 0.60 0.52 0.53 0.44 0.58 1

__________________
1
Pearson correlations are above the diagonal. Spearman correlations are below the diagonal.
2
See table 1 for variable definitions.

39
 TABLE 4
Regression of Institutional Ownership on Decomposition of Firm Value and Control Variables
PIH t = γ 0 + γ 1 BVC t + γ 2 AXC t + γ 3 TVC t + γ 4 SIZE t + γ 5 LEVt + γ 6 SP500 t + γ 7 MAR t + γ 8 BETA t +
1
γ 9 STD t + γ 10 LIQ t + γ 11 YIELD t + γ 12 R & D t + γ 13 TIME t + γ 14 RATE t + γ 15 SGR t + ε t

Panel A: Terminal value forecasted four-years ahead

Institutional Ownership Variables2
TIH DED QIX TRA BNK IA INS P&E
3
INT 0.353 0.122 0.215 0.013 0.152 0.074 0.044 0.020
(0.000) (0.001) (0.012) (0.045) (0.000) (0.328) (0.001) (0.278)
BVC -0.030 -0.001 -0.018 -0.009 0.005 -0.021 -0.021 0.009
(0.047) (0.426) (0.104) (0.000) (0.110) (0.065) (0.001) (0.138)
AXC 0.029 0.007 0.011 0.012 0.026 -0.014 -0.011 0.022
(0.181) (0.332) (0.174) (0.022) (0.000) (0.017) (0.004) (0.231)
TVC -0.031 -0.013 -0.001 -0.017 -0.021 -0.002 -0.005 0.004
(0.113) (0.021) (0.466) (0.032) (0.011) (0.254) (0.407) (0.277)
SIZE 0.009 -0.004 0.006 0.006 -0.010 0.005 0.000 0.017
(0.162) (0.239) (0.061) (0.000) (0.083) (0.166) (0.499) (0.059)
LEV -0.096 -0.002 -0.090 -0.004 -0.012 -0.014 -0.006 -0.042
(0.000) (0.437) (0.000) (0.208) (0.115) (0.148) (0.053) (0.001)
SP500 0.024 0.002 0.027 -0.003 -0.013 0.017 -0.012 0.039
(0.004) (0.231) (0.002) (0.054) (0.000) (0.245) (0.126) (0.000)
MAR -0.005 -0.035 -0.151 0.174 -0.031 0.039 0.123 -0.173
(0.480) (0.029) (0.095) (0.033) (0.265) (0.040) (0.004) (0.004)
BETA 0.073 0.010 0.047 0.017 0.015 0.016 0.007 0.034
(0.005) (0.015) (0.002) (0.077) (0.000) (0.013) (0.109) (0.016)
STD -2.065 -0.406 -1.498 -0.161 -0.398 -0.557 -0.022 -1.000
(0.000) (0.000) (0.000) (0.169) (0.008) (0.285) (0.422) (0.000)
LIQ 1.221 0.009 0.366 0.840 0.353 0.235 0.332 0.281
(0.004) (0.473) (0.174) (0.000) (0.047) (0.158) (0.138) (0.087)
YIELD 0.341 0.132 0.342 -0.105 0.111 -0.164 -0.177 0.527
(0.010) (0.008) (0.010) (0.000) (0.118) (0.019) (0.001) (0.047)
R&D 0.715 0.131 0.349 0.218 0.097 0.141 0.116 0.396
(0.001) (0.000) (0.004) (0.000) (0.177) (0.001) (0.000) (0.014)
TIME 0.003 0.001 0.001 0.001 0.001 0.000 0.000 0.001
(0.001) (0.026) (0.000) (0.009) (0.017) (0.128) (0.482) (0.002)
RATE 0.002 -0.002 0.005 -0.001 -0.002 0.003 -0.001 0.002
(0.001) (0.135) (0.004) (0.006) (0.000) (0.192) (0.209) (0.040)

SGR -0.014 -0.009 -0.004 0.000 -0.011 -0.002 0.005 0.000

(0.038) (0.001) (0.326) (0.431) (0.008) (0.239) (0.118) (0.467)

Avg. Adj. R2 0.20 0.05 0.26 0.21 0.13 0.19 0.19 0.30

40
 TABLE 4 (Continued)
Regression of Institutional Ownership on Decomposition of Firm Value and Control Variables
Panel B: Terminal value forecasted one-year ahead
TIH DED QIX TRA BNK IA INS P&E
INT 0.352 0.123 0.214 0.012 0.152 0.073 0.043 0.020
(0.000) (0.001) (0.010) (0.056) (0.000) (0.285) (0.001) (0.275)
BVC -0.027 -0.001 -0.014 -0.010 0.005 -0.020 -0.019 0.011
(0.049) (0.391) (0.146) (0.000) (0.107) (0.065) (0.001) (0.093)
AXC1 0.100 0.021 0.046 0.034 0.068 -0.021 -0.007 0.044
(0.083) (0.237) (0.074) (0.010) (0.001) (0.066) (0.408) (0.237)
TVC1 -0.022 -0.010 0.000 -0.011 -0.013 -0.004 -0.006 0.007
(0.094) (0.009) (0.483) (0.054) (0.012) (0.100) (0.377) (0.033)
SIZE 0.009 -0.004 0.006 0.006 -0.010 0.005 0.000 0.017
(0.182) (0.237) (0.068) (0.000) (0.080) (0.162) (0.483) (0.062)
LEV -0.094 -0.002 -0.088 -0.004 -0.010 -0.015 -0.006 -0.041
(0.000) (0.450) (0.000) (0.255) (0.157) (0.127) (0.064) (0.001)
SP500 0.025 0.002 0.027 -0.003 -0.012 0.017 -0.012 0.040
(0.005) (0.201) (0.002) (0.061) (0.000) (0.246) (0.114) (0.000)
MAR -0.007 -0.033 -0.156 0.177 -0.029 0.036 0.121 -0.175
(0.472) (0.022) (0.092) (0.031) (0.281) (0.045) (0.005) (0.003)
BETA 0.071 0.009 0.046 0.017 0.014 0.017 0.007 0.033
(0.004) (0.014) (0.002) (0.081) (0.000) (0.014) (0.105) (0.015)
STD -2.068 -0.411 -1.489 -0.169 -0.404 -0.553 -0.018 -1.001
(0.000) (0.000) (0.000) (0.157) (0.008) (0.273) (0.432) (0.000)
LIQ 1.233 0.014 0.367 0.845 0.359 0.233 0.334 0.284
(0.004) (0.459) (0.182) (0.000) (0.040) (0.166) (0.156) (0.091)
YIELD 0.345 0.136 0.333 -0.096 0.123 -0.170 -0.182 0.522
(0.010) (0.007) (0.012) (0.000) (0.097) (0.018) (0.001) (0.050)
R&D 0.718 0.130 0.356 0.214 0.094 0.142 0.118 0.400
(0.001) (0.000) (0.004) (0.000) (0.182) (0.001) (0.000) (0.017)
TIME 0.003 0.001 0.001 0.001 0.001 0.000 0.000 0.001
(0.001) (0.022) (0.000) (0.009) (0.017) (0.132) (0.495) (0.002)
RATE 0.002 -0.002 0.005 -0.001 -0.002 0.003 -0.001 0.003
(0.002) (0.135) (0.003) (0.006) (0.000) (0.183) (0.234) (0.038)
SGR -0.014 -0.009 -0.004 -0.001 -0.011 -0.002 0.006 0.000
(0.041) (0.001) (0.327) (0.401) (0.007) (0.252) (0.103) (0.465)
Avg. Adj. R2 0.20 0.05 0.26 0.21 0.14 0.19 0.19 0.30
1
Regressions are run yearly and mean coefficients are reported. The p-values in parentheses are based on a
standard error derived from the distribution of these coefficients, adjusted for serial correlation.
2
The PIH variable is replaced in the regression by the other variables indicated in the top row, where TIH = total
institutional ownership, DED = dedicated, QIX = quasi-indexer, TRA = transient, BNK= banks, IA = investment
advisers, INS = insurance companies, and P&E = pensions and endowments
3
See table 1 for variable definitions. AXC1 (TVC1) is the near-term earnings (terminal value) computed with the
horizon set at one-year ahead.

41
 TABLE 5
Regression of Three-Year Changes in Institutional Ownership on Three-Year Changes in the
Decomposition of Firm Value and in Control Variables
CPIHt = γ 0 + γ 1CBVCt + γ 2CAXCt + γ 3CTVCt + γ 4CSIZEt + γ 5CLEVt + γ 6CSP500t + γ 7CMARt + γ 8CBETAt +
1
γ 9CSTDt + γ 10CLIQt + γ 11CYIELDt + γ 12CR & Dt + γ 13TIMEt −3 + γ 14CRATEt + γ 15CSGRt + ε t

Panel A: Terminal value forecasted four-years ahead

Institutional Ownership Variables2
CTIH CDED CQIX CTRA CBNK CIA CINS CP&E
INT3 0.060 0.015 0.039 0.007 0.000 0.041 0.018 0.001
(0.000) (0.005) (0.000) (0.102) (0.488) (0.046) (0.009) (0.472)
CBVC 0.002 0.000 0.003 0.001 0.003 -0.002 -0.003 0.006
(0.313) (0.495) (0.067) (0.231) (0.095) (0.264) (0.150) (0.109)
CAXC 0.021 0.003 0.003 0.017 0.022 -0.019 -0.003 0.017
(0.129) (0.230) (0.359) (0.050) (0.013) (0.053) (0.122) (0.139)
CTVC -0.002 0.000 0.010 -0.010 -0.004 -0.005 -0.001 0.014
(0.382) (0.492) (0.003) (0.043) (0.117) (0.153) (0.222) (0.011)
CSIZE 0.038 -0.005 0.016 0.021 -0.006 0.024 0.018 -0.001
(0.000) (0.245) (0.004) (0.000) (0.189) (0.008) (0.012) (0.428)
CLEV -0.020 0.008 -0.033 0.006 0.006 0.033 0.015 -0.059
(0.129) (0.254) (0.004) (0.257) (0.224) (0.119) (0.003) (0.000)
CSP500 -0.014 -0.004 0.008 -0.015 -0.023 0.021 -0.015 0.010
(0.005) (0.356) (0.059) (0.022) (0.047) (0.087) (0.001) (0.380)
CMAR -0.038 -0.075 -0.070 0.112 -0.044 0.033 0.061 -0.099
(0.154) (0.043) (0.030) (0.006) (0.013) (0.189) (0.001) (0.026)
CBETA 0.008 0.005 0.002 0.003 -0.001 0.011 -0.001 0.002
(0.037) (0.028) (0.142) (0.327) (0.407) (0.002) (0.245) (0.316)
CSTD -0.526 -0.246 -0.364 0.026 -0.130 -0.195 0.053 -0.302
(0.000) (0.001) (0.001) (0.395) (0.081) (0.190) (0.060) (0.007)
CLIQ 0.476 0.076 0.171 0.212 0.002 0.088 -0.031 0.397
(0.010) (0.253) (0.315) (0.233) (0.495) (0.248) (0.407) (0.006)
CYIELD -0.017 0.051 0.035 -0.109 -0.114 -0.110 0.080 0.220
(0.472) (0.319) (0.264) (0.135) (0.323) (0.194) (0.033) (0.008)
CR&D -0.516 -0.254 -0.311 0.015 -0.265 0.068 -0.109 -0.182
(0.113) (0.219) (0.037) (0.441) (0.226) (0.401) (0.169) (0.161)
TIME 0.000 0.000 0.000 0.000 0.000 0.002 0.000 -0.001
(0.262) (0.052) (0.304) (0.325) (0.028) (0.078) (0.004) (0.254)
CRATE 0.001 0.001 0.001 -0.001 0.001 -0.001 -0.001 0.002
(0.353) (0.138) (0.338) (0.094) (0.277) (0.256) (0.214) (0.194)
CSGR 0.030 0.008 0.016 0.003 0.014 0.014 -0.002 0.000
(0.014) (0.278) (0.035) (0.428) (0.017) (0.027) (0.402) (0.495)
Avg. Adj. R2 0.06 0.03 0.04 0.13 0.05 0.13 0.10 0.09

42
 TABLE 5 (continued)
Regression of Three-Year Changes in Institutional Ownership on Three-Year Changes in the
Decomposition of Firm Value and in Control Variables
Panel B: Terminal value forecasted one-year ahead
CTIH CDED CQIX CTRA CBNK CIA CINS CP&E
INT 0.059 0.015 0.039 0.007 0.000 0.041 0.018 0.002
(0.000) (0.006) (0.000) (0.115) (0.489) (0.045) (0.010) (0.468)
CBVC 0.005 0.000 0.006 0.000 0.003 -0.001 -0.003 0.008
(0.100) (0.476) (0.006) (0.408) (0.118) (0.393) (0.165) (0.082)
CAXC1 0.058 0.006 0.032 0.023 0.045 -0.024 -0.003 0.037
(0.022) (0.324) (0.049) (0.019) (0.032) (0.085) (0.325) (0.054)
CTVC1 0.001 0.000 0.006 -0.005 -0.001 -0.007 -0.002 0.013
(0.452) (0.458) (0.058) (0.276) (0.346) (0.064) (0.300) (0.015)
CSIZE 0.037 -0.005 0.014 0.022 -0.006 0.024 0.018 -0.003
(0.000) (0.247) (0.007) (0.000) (0.166) (0.009) (0.023) (0.311)
CLEV -0.017 0.009 -0.031 0.006 0.008 0.033 0.014 -0.057
(0.169) (0.244) (0.004) (0.250) (0.175) (0.148) (0.003) (0.000)
CSP500 -0.014 -0.004 0.008 -0.014 -0.023 0.021 -0.015 0.010
(0.005) (0.361) (0.056) (0.022) (0.045) (0.091) (0.001) (0.380)
CMAR -0.025 -0.072 -0.063 0.115 -0.036 0.033 0.061 -0.093
(0.211) (0.043) (0.028) (0.005) (0.028) (0.180) (0.001) (0.047)
CBETA 0.008 0.005 0.003 0.002 -0.001 0.011 -0.001 0.003
(0.023) (0.025) (0.068) (0.369) (0.380) (0.002) (0.237) (0.296)
CSTD -0.530 -0.247 -0.375 0.031 -0.132 -0.194 0.052 -0.310
(0.000) (0.001) (0.000) (0.366) (0.067) (0.184) (0.065) (0.006)
CLIQ 0.476 0.075 0.164 0.218 0.007 0.078 -0.029 0.391
(0.009) (0.256) (0.327) (0.230) (0.481) (0.265) (0.411) (0.007)
CYIELD -0.009 0.053 0.039 -0.105 -0.107 -0.114 0.084 0.226
(0.484) (0.310) (0.244) (0.142) (0.332) (0.182) (0.027) (0.007)
CR&D -0.506 -0.252 -0.292 0.005 -0.259 0.082 -0.112 -0.184
(0.114) (0.214) (0.040) (0.479) (0.238) (0.379) (0.164) (0.160)
TIME 0.000 0.000 0.000 0.000 0.000 0.002 0.000 -0.001
(0.294) (0.043) (0.310) (0.344) (0.049) (0.080) (0.003) (0.257)
CRATE 0.001 0.001 0.001 -0.001 0.001 -0.001 -0.001 0.002
(0.323) (0.141) (0.302) (0.097) (0.246) (0.277) (0.218) (0.189)
CSGR 0.028 0.009 0.013 0.003 0.013 0.013 -0.002 -0.002
(0.015) (0.266) (0.078) (0.399) (0.023) (0.010) (0.415) (0.429)
Avg. Adj. R2 0.06 0.03 0.04 0.13 0.05 0.13 0.10 0.09
1
Regressions are run yearly and mean coefficients are reported. The p-values in parentheses are based on a
standard error derived from the distribution of these coefficients, adjusted for serial correlation.
2
The CPIH variable is a three-year change in holdings. The PIH variable is replaced in the regression by the other
variables indicated in the top row, where TIH = total institutional ownership, DED = dedicated, QIX = quasi-
indexer, TRA = transient, BNK= banks, IA = investment advisers, INS = insurance companies, and P&E = pensions
and endowments
3
Variables are three-year changes in the variables defined in table 1. AXC1 (TVC1) is the near-term earnings
(terminal value) computed with the horizon set at one-year ahead.

43
 TABLE 6
Regression of Price on the Decomposition of Firm Value Interacted with Indicators for High Levels of Institutional Ownership
Pt = α0 + α1DPIHt + α2BVt + α3 ( BV * DPIH) t + α4PVAXt + α5 ( PVAX * DPIH) t + α6PVTVt + α7 ( PVTV * DPIH) t + η jt 1

Panel A: Regression without Institutional Ownership Interactions

Horizon INT BV PXAX PVTV

4 year ahead 3.766 0.988 1.206 0.684
p-value (=0)2 (0.002) (0.000) (0.000) (0.000)
p-value (=1) (0.462) (0.032) (0.000)

1 year ahead 4.073 1.014 2.571 0.673

p-value (=0) (0.002) (0.000) (0.000) (0.000)
p-value (=1) (0.455) (0.003) (0.000)

Panel B: Regression with Interactions of Institutional Ownership classified by Investment Horizon

BV* BV* BV*

Horizon INT DTRA DQIX DDED BV DTRA DQIX DDED
4 year ahead 3.676 7.205 1.995 -1.941 0.988 -0.217 0.089 0.003
p-value (=0) (0.000) (0.001) (0.004) (0.091) (0.000) (0.076) (0.014) (0.487)
p-value (=1) (0.461) (0.104) (0.135) (0.451)

1 year ahead 4.017 6.950 1.646 -2.048 0.996 -0.199 0.109 0.065
p-value (=0) (0.000) (0.002) (0.014) (0.069) (0.000) (0.098) (0.010) (0.235)
p-value (=1) (0.484) (0.136) (0.070) (0.240)

PVAX* PVAX* PVAX* PVTV* PVTV* PVTV*

Horizon PVAX DTRA DQIX DDED PVTV DTRA DQIX DDED
4 year ahead 1.182 0.394 0.311 -0.093 0.654 -0.134 -0.036 0.116
p-value (=0) (0.000) (0.086) (0.019) (0.396) (0.000) (0.032) (0.228) (0.180)
p-value (=1) (0.129) (0.024) (0.004) (0.293) (0.000) (0.000) (0.000) (0.079)

1 year ahead 2.383 1.936 1.057 0.015 0.655 -0.119 -0.023 0.058
p-value (=0) (0.000) (0.006) (0.028) (0.492) (0.000) (0.036) (0.310) (0.210)
p-value (=1) (0.004) (0.006) (0.000) (0.004) (0.000) (0.000) (0.000) (0.012)

44
 TABLE 6 (Continued)
Regression of Price on the Decomposition of Firm Value Interacted with Indicators for High Levels of Institutional Ownership

Panel C: Regression with Interactions of Institutional Ownership classified by Fiduciary Standards

BV* BV* BV* BV*

Horizon INT DBNK DIIA DINS DPNE BV DBNK DIA DINS DP&E
4 year ahead 4.740 1.519 0.507 0.576 1.436 0.983 -0.115 0.027 -0.088 0.004
p-value (=0) (0.000) (0.227) (0.354) (0.380) (0.229) (0.000) (0.216) (0.424) (0.055) (0.472)
p-value (=1) (0.458) (0.143) (0.480) (0.239) (0.418)

1 year ahead 4.943 1.452 0.475 0.724 1.114 0.980 -0.112 0.206 -0.064 0.043
p-value (=0) (0.000) (0.268) (0.405) (0.375) (0.274) (0.000) (0.214) (0.130) (0.168) (0.211)
p-value (=1) (0.436) (0.165) (0.195) (0.306) (0.412)

PVAX* PVAX* PVAX* PVAX* PVTV* PVTV* PVTV* PVTV*

Horizon PVAX DBNK DIA DINS DP&E PVTV DBNK DIA DINS DP&E
4 year ahead 1.310 -0.038 -0.180 -0.149 -0.229 0.563 -0.083 0.212 0.141 0.005
p-value (=0) (0.000) (0.428) (0.223) (0.217) (0.196) (0.000) (0.233) (0.037) (0.019) (0.469)
p-value (=1) (0.035) (0.040) (0.305) (0.358) (0.293) (0.000) (0.003) (0.021) (0.008) (0.000)

1 year ahead 2.632 0.036 1.913 -0.152 -0.254 0.594 -0.084 0.031 0.105 -0.042
p-value (=0) (0.000) (0.468) (0.007) (0.365) (0.408) (0.000) (0.273) (0.319) (0.020) (0.323)
p-value (=1) (0.009) (0.001) (0.001) (0.067) (0.006) (0.000) (0.002) (0.000) (0.013) (0.000)

__________________
1
See table 1 for variable definitions. BV, PVAX, and PVTV are the undeflated values of BVC, AXC, and TVC, respectively. DPIH equals one if institutional
ownership is in the top quintile, zero otherwise. The PIH variable is replaced by the other variables indicated in the top row, where DED = dedicated, QIX =
quasi-indexer, TRA = transient, BNK= banks, IA = investment advisers, INS = insurance companies, and P&E = pensions and endowments.
2
Regressions are run yearly and mean coefficients are reported. The p-values in parentheses are based on a standard error derived from the distribution of these
coefficients, adjusted for serial correlation. “P-value (=0)” represents the p-value that tests whether the mean coefficient is significantly different from zero.
“P-value (=1)” represents the p-value that tests whether the mean coefficient is significantly different from one; for interaction variables, this test is whether the
sum of the interacted and uninteracted coefficients is different from one.

45
 TABLE 7
Regression of Future Size-Adjusted Returns on Ranked Values of Firm Value Components interacted with Institutional Ownership
CAR ( I) t = β 0 + β 1 RBVC t + β 2 ( RBVC * RPIH ) t + β 3 RAXC t + β 4 ( RAXC * RPIH ) t + β 5 RTVC t + β 6 ( RTVC * RPIH ) t + 1
β 7 RSIZE t + β 8 RBETA t + β 9 REP t + ξ jt

Panel A: Regression without Institutional Ownership Interactions

Four-year Horizon One-year Horizon

RBVC RAXC RTVC RBVC1 RAXC1 RTVC1
CAR1 0.022 0.043 -0.036 0.095 0.107 -0.021
(0.190) (0.129) (0.156) (0.003) (0.026) (0.246)
CAR2 0.047 0.076 -0.083 0.227 0.215 -0.036
(0.178) (0.034) (0.072) (0.002) (0.006) (0.230)
CAR3 0.048 0.083 -0.155 0.317 0.301 -0.103
(0.279) (0.085) (0.024) (0.003) (0.005) (0.039)
CAR4 0.149 0.128 -0.193 0.504 0.435 -0.114
(0.069) (0.047) (0.026) (0.003) (0.002) (0.045)
CAR5 0.282 0.155 -0.208 0.653 0.489 -0.111
(0.015) (0.063) (0.018) (0.002) (0.000) (0.072)

46
 TABLE 7 (Continued)
Regression of Future Size-Adjusted Returns on Ranked Values of Firm Value Components interacted with Institutional Ownership
Panel B: Regression with Interactions of Institutional Ownership classified by Investment Horizon
Four-year Horizon
RBVC* RBVC* RBVC* RAXC* RAXC* RAXC* RTVC* RTVC* RTVC*
RBVC RTRA RQIX RDED RAXC RTRA RQIX RDED RTVC RTRA RQIX RDED
CAR1 -0.024 0.133 0.001 -0.005 0.044 -0.053 -0.053 0.107 -0.065 0.068 0.080 -0.078
(0.214) (0.071) (0.492) (0.447) (0.171) (0.190) (0.295) (0.105) (0.191) (0.229) (0.166) (0.210)
CAR2 -0.007 0.103 0.117 -0.018 0.130 -0.145 -0.090 0.150 -0.203 0.225 0.110 -0.069
(0.463) (0.115) (0.009) (0.329) (0.010) (0.033) (0.319) (0.031) (0.016) (0.036) (0.150) (0.186)
CAR3 -0.063 0.090 0.212 0.057 0.167 -0.130 -0.214 0.208 -0.320 0.260 0.281 -0.163
(0.282) (0.209) (0.008) (0.201) (0.020) (0.238) (0.265) (0.035) (0.021) (0.031) (0.057) (0.055)
CAR4 -0.032 0.138 0.365 0.057 0.227 -0.125 -0.159 0.152 -0.371 0.247 0.259 -0.089
(0.431) (0.147) (0.010) (0.250) (0.023) (0.357) (0.350) (0.155) (0.006) (0.181) (0.134) (0.226)
CAR5 -0.016 0.282 0.489 0.080 0.271 -0.145 -0.280 0.289 -0.390 0.235 0.389 -0.196
(0.477) (0.077) (0.061) (0.180) (0.035) (0.368) (0.317) (0.122) (0.006) (0.256) (0.177) (0.242)

One-year Horizon
RBVC1* RBVC1* RBVC1* RAXC1* RAXC1* RAXC1* RTVC1* RTVC1* RTVC1*
RBVC1 RTRA RQIX RDED RAXC1 RTRA RQIX RDED RTVC1 RTRA RQIX RDED
CAR1 0.044 0.127 -0.017 -0.006 0.112 -0.041 -0.078 0.096 -0.072 0.064 0.110 -0.061
(0.036) (0.074) (0.325) (0.413) (0.038) (0.249) (0.220) (0.114) (0.163) (0.199) (0.070) (0.247)
CAR2 0.156 0.100 0.095 -0.025 0.243 -0.132 -0.081 0.153 -0.160 0.217 0.104 -0.054
(0.018) (0.138) (0.020) (0.286) (0.025) (0.048) (0.336) (0.016) (0.019) (0.052) (0.138) (0.282)
CAR3 0.201 0.075 0.186 0.015 0.323 -0.128 -0.121 0.211 -0.260 0.281 0.177 -0.117
(0.058) (0.267) (0.012) (0.412) (0.039) (0.251) (0.373) (0.008) (0.007) (0.014) (0.170) (0.136)
CAR4 0.325 0.089 0.323 0.020 0.470 -0.173 -0.028 0.159 -0.298 0.334 0.118 -0.045
(0.059) (0.216) (0.008) (0.404) (0.011) (0.257) (0.476) (0.062) (0.006) (0.023) (0.302) (0.325)
CAR5 0.380 0.167 0.447 0.036 0.542 -0.189 -0.112 0.242 -0.317 0.366 0.182 -0.094
(0.071) (0.124) (0.037) (0.336) (0.002) (0.282) (0.413) (0.085) (0.042) (0.106) (0.251) (0.319)

47
 TABLE 7 (Continued)
Regression of Future Size-Adjusted Returns on Ranked Values of Firm Value Components interacted with Institutional Ownership
Panel D: Regression with Interactions of Institutional Ownership classified by Fiduciary Standards
Four-year Horizon
RBVC* RBVC* RBVC* RBVC* RAXC* RAXC* RAXC* RAXC* RTVC* RTVC* RTVC* RTVC*
RBVC RBNK RIA RINS RP&E RAXC RBNK RIA RINS RP&E RTVC RBNK RIA RINS RP&E
CAR1 -0.007 0.047 0.035 -0.028 0.026 0.049 0.061 0.077 -0.182 0.039 -0.082 -0.025 -0.084 0.243 -0.026
(0.401) (0.119) (0.212) (0.139) (0.358) (0.113) (0.256) (0.201) (0.085) (0.382) (0.106) (0.421) (0.167) (0.026) (0.443)
CAR2 0.000 0.082 -0.010 0.018 0.071 0.124 -0.023 0.090 -0.284 0.130 -0.210 0.040 0.042 0.276 -0.074
(0.498) (0.071) (0.443) (0.325) (0.122) (0.027) (0.447) (0.263) (0.058) (0.266) (0.011) (0.409) (0.408) (0.055) (0.366)
CAR3 -0.106 0.069 0.044 0.110 0.184 0.145 -0.176 0.203 -0.338 0.215 -0.277 0.240 -0.105 0.292 -0.155
(0.171) (0.141) (0.368) (0.115) (0.019) (0.019) (0.294) (0.145) (0.033) (0.303) (0.003) (0.286) (0.288) (0.066) (0.358)
CAR4 -0.081 0.287 -0.018 0.125 0.214 0.184 -0.198 0.262 -0.411 0.283 -0.301 0.252 -0.097 0.327 -0.217
(0.347) (0.010) (0.427) (0.169) (0.023) (0.025) (0.301) (0.115) (0.033) (0.321) (0.000) (0.255) (0.359) (0.132) (0.349)
CAR5 -0.101 0.441 -0.138 0.255 0.398 0.246 -0.269 0.269 -0.559 0.440 -0.312 0.272 0.070 0.373 -0.447
(0.369) (0.008) (0.171) (0.018) (0.005) (0.039) (0.191) (0.200) (0.056) (0.274) (0.002) (0.193) (0.421) (0.179) (0.260)

One-year Horizon
RBVC1* RBVC1* RBVC1* RBVC1* RAXC1* RAXC1* RAXC1* RAXC1* RTVC1* RTVC1* RTVC1* RTVC1*
RBVC1 RBNK RIA RINS RP&E RAXC1 RBNK RIA RINS RP&E RTVC1 RBNK RIA RINS RP&E
CAR1 0.069 0.029 0.006 -0.007 0.031 0.106 0.077 0.071 -0.154 0.009 -0.075 -0.028 -0.051 0.203 -0.004
(0.010) (0.102) (0.453) (0.362) (0.295) (0.041) (0.189) (0.267) (0.104) (0.475) (0.132) (0.387) (0.285) (0.031) (0.491)
CAR2 0.181 0.060 -0.064 0.066 0.069 0.229 0.009 0.134 -0.269 0.096 -0.154 0.026 0.045 0.244 -0.050
(0.024) (0.083) (0.220) (0.026) (0.079) (0.022) (0.475) (0.148) (0.113) (0.323) (0.007) (0.420) (0.364) (0.102) (0.398)
CAR3 0.197 0.073 -0.040 0.137 0.133 0.289 -0.061 0.264 -0.344 0.176 -0.211 0.122 -0.081 0.307 -0.097
(0.088) (0.053) (0.372) (0.032) (0.083) (0.028) (0.421) (0.107) (0.048) (0.334) (0.002) (0.350) (0.355) (0.057) (0.389)
CAR4 0.311 0.266 -0.101 0.149 0.148 0.390 -0.120 0.325 -0.418 0.316 -0.201 0.188 -0.064 0.341 -0.231
(0.085) (0.052) (0.146) (0.104) (0.183) (0.005) (0.360) (0.095) (0.055) (0.305) (0.024) (0.277) (0.419) (0.114) (0.312)
CAR5 0.333 0.425 -0.192 0.249 0.249 0.457 -0.202 0.407 -0.590 0.447 -0.200 0.219 0.000 0.433 -0.390
(0.125) (0.048) (0.075) (0.040) (0.088) (0.001) (0.280) (0.109) (0.077) (0.280) (0.149) (0.270) (0.500) (0.175) (0.261)
__________________
1
See table 1 for variable definitions. CAR1-CAR6 are the buy-and-hold size-adjusted returns 1-6 years after the Value Line forecast release. RBV, RAXC, RTVC, RSIZE,
RBETA, and REP are the scaled decile rank values of BVC, AXC, TVC, SIZE, BETA, and EP respectively. RPIH is the quintile of total institutional ownership. The PIH
variable is replaced by the other variables indicated in the top row, where DED = dedicated, QIX = quasi-indexer, TRA = transient, BNK= banks, IA = investment advisers,
INS = insurance companies, and P&E = pensions and endowments. Regressions are run yearly and mean coefficients are reported. The p-values in parentheses are based
on a standard error derived from the distribution of these coefficients, adjusted for serial correlation.

48