Journal of Financial and Quantitative Analysis

Research Articles

The Value of Active Investing: Can Active Institutional Investors Remove Excess Comovement of Stock Returns?

Pengfei Yea1

a1 Lally School of Management and Technology, Rensselaer Polytechnic Institute, 110 8th St., Troy, NY 12180. yep@rpi.edu

Abstract

This study uses Cremers and Petajisto’s (2009) method to separate active institutional investors from passive ones and shows that active investors can alleviate the anomalous comovement of stock returns. Focusing on 2 events linked to the excess comovement anomaly, Standard & Poor’s 500 Index additions and stock splits, I find that if an event stock has more active institutional investors trading in the post-event period, the anomalous comovement effect disappears. In contrast, if an event stock experiences a massive exit of active investors, this anomaly persists. The exit of active institutional investors also results in a strong price synchronicity effect.

(Online publication January 30 2012)

Footnotes

I thank Stephen Brown (the editor), Martijn Cremers (the referee), Yiwei Fang, Bill Francis, David Goldenberg, Iftekhar Hasan, Jim Hsieh, Shyam Kumar, Suresh Mani, Enrico Onali, Antti Petajisto, Qinghai Wang, Jeff Wurgler, and participants at the 2010 Financial Management Association (FMA) conference in New York City for their helpful comments. I also thank Jeff Wurgler for making his data available for this research. All errors are mine.

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