The Relationship between Price Momentum and Institutional Ownership

Abstract

This paper tests whether momentum is related to the institutional holding level. The empirical evidence shows that when controlled for the effect of firm size, momentum profits are positively related to institutional holdings. Moreover, this relationship seems to be stronger in small-capitalization firms. The result is consistent with previous literature that institutional investors tend to herd and have positive-feedback trading in smaller firms. Our finding suggests that investors could choose smaller firms with higher institutional holdings to achieve higher momentum profits. Furthermore, we find that the change of institutional holding is positively related to next quarter’s return, which is consistent with the hypothesis that institutional investors are better informed than individual investors.