In the September 2005 version of their paper entitled “Investor Recognition and Stock Returns”, Reuven LeHavy and Richard Sloan analyze the relation between how widely a stock is recognized and its returns (past and future). They use change in the proportion of quarterly SEC Form 13-F filers (institutional investment managers who exercise investment discretion over $100 million) holding a stock to represent the change in investor recognition of that stock. Using Form 13-F and stock price data over the period 1982-2004, they find that:
- The more widely a stock is known (held by institutions), the better its past returns.
- The more widely a stock is known (held by institutions), the worse its future returns.
- These effects are at least as strong as the effects of news about cash flows.
- The greater the volatility of a stock’s price, the stronger the effects.
- The more widely a stock is known, the greater the company’s financing activities (such as secondary offerings) and investment spending.
The following figure illustrates the first two of the above points, showing that a large positive (negative) change in the breadth of institutional holding relates to high (low) returns over the past two years. It also show that these unusual past returns revert (even reverse) the next couple of years.
In summary, the greatest returns are to be found on average among stocks least widely held by institutions.
