Institutional Investor and Asymmetric Beta

Emily J. Huang*

September 10, 2010

JEL classification: G12; G23 Keywords: Institutional investors; Asymmetric beta

Huang is from the Department of Finance, School of Business Administration, Wayne State University, Detroit, Michigan, 48202, (313)577-4487, hjemily@wayne.edu. The author thanks Richard Sias and Harry Turtle for their extensive comments and valuable suggestions.
*

Institutional Investor and Asymmetric Beta

Abstract I examine the relation between ownership by institutional versus individual investors and beta asymmetry (the difference between downside beta and upside beta). I find beta asymmetry is negatively associated with institutional ownership. This inverse relation may be explained by two alternative hypotheses. First, institutional investors may be less willing (than individual investors) to hold stocks with high asymmetric beta (the preference explanation). Second, differences in individual and institutional investors behavior in rising and falling markets cause beta asymmetry (the trading-impact explanation). The results from my analysis of the causality between net institutional demand and changes in asymmetric beta are consistent with the trading-impact explanation, and indicate that institutional investors buy to a greater extent during an up market than they sell during a down market.

JEL classification: G12; G23 Keywords: Institutional investors; Asymmetric beta

Institutional Investor and Asymmetric Beta 1. Introduction Downside (upside) beta measures the sensitivity of an individual stocks returns to the market returns when the market is declining (rising). The commonly applied Sharpe-Lintner Capital Asset Pricing Model (CAPM) assumes stocks have symmetric downside and upside beta (Sharpe (1964), Lintner (1965)). However, a growing literature provides evidence suggesting that the downside beta of a stock may differ from the upside beta of this stock (see, for instance, Kim and Zumwalt (1979), Chen (1982), Jagannathan and Korajczyk (1986), Wiggins (1992), Ang, Chen and Xing (2006), Hong, Tu and Zhou (2007)). A number of studies have offered an assortment of explanations of asymmetric beta ranging from firm characteristics (Jagannathan and Korajczyk (1986)), to return attributes (Wiggins (1992)), to investors asymmetric responses to upside and downside return variations (Dennis and Strickland (2002)). Clearly, investors prefer higher upside beta and lower downside beta. A security whose returns are less sensitive to downward market movements and more sensitive to upward market movements exposes its shareholders to less downside risk and provides the shareholders more upside potential. Thus, investors will not hold securities with high asymmetric beta (defined as downside beta less upside beta) unless those securities provide a return premium. Recent empirical evidence (Cho and Engle (1999), Bekaert and Wu (2000), Ang, Chen and Xing (2006), Post, Van Vliet and Lansdorp (2009)) suggests beta asymmetry is priced, i.e., stocks with larger asymmetric betas earn average larger returns than stocks with smaller asymmetric betas. The primary goal of this study is to investigate the relation between ownership by institutional versus individual investors and asymmetric beta. No previous study has addressed the impacts of the difference between institutional investors and individual investors on beta asymmetry.

I argue that this difference may play an essential role in beta asymmetry because of the following two reasons. First, institutional and individual investors may have different preferences for beta asymmetry so institutional investors may choose a different desired holding level of stocks with high asymmetric beta from that of individual investors. Second, the trading strategy of institutional or individual investors during a rising market may differ from the strategies they use during a declining market. Thus, the net demand from one group of investors may drive beta asymmetry. These two explanations, of course, are not mutually exclusive because the asymmetry-driving group of investors may endogenously incorporate asymmetric betas into their decision-making processes and then lead to variations in beta asymmetry. Thus, the second goal of the study is to differentiate among these alternative explanations by addressing the research question: Do changes in beta asymmetry lead to changes in institutional holding level and/or do changes in institutional holding level lead to changes in beta asymmetry? Individual and institutional investors may differ in their willingness to bear downside risk because of two reasons. First, individual investors may avoid downside risk to a greater extent than they prefer upside variation because they are loss-averse (Kahneman and Tversky (1979), Gul (1991)). Loss aversion suggests that investors irrationally strongly prefer avoiding losses to acquiring gains (Kahneman and Tversky (1979), Gul (1991)). An investor with strong loss aversion would avoid securities with high downside beta. It is typically argued that individual investors are likely to exhibit loss aversion (Thaler and Johnson (1990), Odean (1998), Barberis and Huang (2001), Genesove and Mayer (2001)). Second, institutional investors may expel stocks with high downside risk as a result of the restrictions of common law and regulations on institutional security selection (Badrinath, Gay and Kale (1989), Del Guercio (1996), Aalberts and Poon (1996), Badrinath, Kale and Ryan (1996)). Institutional investors may bear extra loss other than the loss on the value of their investment

portfolio if the total value of their portfolio declines, while they receive no extra gain if the portfolio value increases. For instance, Badrinath, Gay and Kale (1989) argue that, if institutional investors underperform the market, institutions may add the legal and reputation costs that they are facing, to the costs that institutional investors have to bear from losing their compensations. However, if institutional investors outperform, they do not receive additional reward other than gaining compensations. Thus, even under a symmetric compensation scheme, institutional investors may still have asymmetric incentives as a result of the additional downside costs. Hence, legal and regulatory effects may cause institutional investors to be more sensitive to downside risk than to upside risk and avoid stocks with high asymmetric beta. Two necessary conditions for institutional investors to drive asymmetric beta include that institutional trading drives security prices, and institutional investors use different trading strategies during a rising market and a declining market. Recent literature supports that institutional investors are net liquidity demanders, whose trades, in aggregate, move prices for the average security (see, for instance, Sias, Starks and Titman (2006), Kaniel, Saar and Titman (2008), Chakravarty (2001), Froot and Teo (2004)). If institutions sell more during a declining market than they buy during a rising market, an increase in institutional ownership should precede an increase in asymmetric beta. On the other hand, an increase in institutional investor holdings leads to a decrease in asymmetric beta when institutions buy more during a rising market than they sell during a declining market. Prior studies provide mixed evidence on the different trading strategies used by institutional investors during a declining market and during a rising market. There are two possible reasons that institutions may buy more when the market is rising and sell less when the market is declining. First, institutional investors have better market-timing skills so they may predict the downward market movements and sell before the market declines. For instance, Brunnermeier and Nagel (2004) find that hedge funds hold a higher proportion of assets in

technology sectors than the market portfolio does before the price peak of technology bubble and they reduce their holdings in stocks whose prices fall down afterwards. Brunnermeier and Nagles evidence supports that hedge funds ride the dot-com bubble and they profit from their correct prediction of price-trends during the bubble. Secondly, institutional investors may extrapolate individuals expectations. For example, De Long, et al. (1990b) assume that noise traders employ a simple strategy of buying (selling) when prices go up (down). While rational speculators anticipate the trend-chasing behavior of noise traders, speculators would buy/sell to a greater degree than pure arbitrageurs would do. Thus, rational speculation of informed investors sets off positive feedback trading of noise traders, whose trades push prices away from fundamental values and destabilize prices. Thus, institutional investors may buy already-overpriced stocks and push prices even higher during a rising market because they expect individual investors would chase the price trend. However, because institutional investors are subject to stricter laws and regulations than are individuals (see, for instance, Badrinath, Gay and Kale (1989), Del Guercio (1996)), institutions may only sell the stocks in their portfolios and do not use short-sale strategy during a declining market even if they can predict the declining trend. The extent of institutional selling when the market is declining may be greater than the extent of institutional buying when the market is rising because of: (a) institutional investors use stop-loss policies to prevent them from losing abruptly when the market falls (Shiller (1987), De Long, et al. (1990b)); and (b) they may be punished more if they fail to sell when the market is declining than if they fail to buy when the market is rising (Keim and Madhavan (1995)). During a market decline, the aggregated stop-loss selling behavior, which intends to prevent institutions from additional loss, may move stock prices down further, which increases asymmetric beta. Keim and Madhavan (1995) argue that accountants may recognize an unexercised sell order during a market decline as an observable loss, while not treating an unexercised buy order during a market rise as a

loss because the unexecuted order is an immeasurable opportunity cost. Due to the accounting effect, institutional investors would be more averse to downside risk than they prefer upside variation and respond to a negative market shock more quickly than they do to a positive market shock. Asymmetric beta serves as a natural research vehicle for exploring the different trading patterns of institutional investors during a risking market and during a declining market. I begin my investigation by computing the correlation between level of institutional ownership and contemporaneous level of beta asymmetry. Using simple correlations and sorts, I document a strong negative relation between asymmetric betas and the fraction of shares owned by institutional investors. Moreover, controlling for other characteristics known to explain institutional ownership (e.g., firm size, age, and price), the relation between beta asymmetry and institutional ownership remains intact. In sum, institutional (individual) ownership is lower (higher) when downside beta is greater than upside beta. The inverse relation between beta asymmetry and institutional ownership suggests that either (1) institutional investors are less willing (than individual investors) to hold stock with high asymmetric beta despite the pricing of asymmetric beta risk (the preference explanation) or (2) differences in individual and institutional investors behavior in rising and falling markets cause beta asymmetry (the trading-impact explanation), i.e., either institutional investors are more likely to positive-feedback trade in an up market than a down market (thus reducing beta asymmetry) or individual investors are more likely to positive feedback trade in a down market than an up market (thus increasing beta asymmetry). To differentiate between the preference explanation and the trading-impact explanation, I examine: (1) whether lag changes in the level of beta asymmetry have impacts on net institutional demand and, (2) whether lag changes in institutional ownership contribute to changes in beta

asymmetry. Inconsistent with the preference explanation, I find no evidence of a meaningful relation between changes in asymmetric beta and subsequent net institutional demand. Consistent with the trading impact explanation, however, I document that an increase in institutional ownership forecasts a decline in beta asymmetry and vice versa. My results suggest that either institutional investors sell less in a declining market than they buy in a rising market or individual sell more in a declining market than they buy in a rising market. The balance of this paper is organized as follows. Section 2 describes the data. Section 3 presents the methodology and empirical results. Section 4 concludes the paper. 2. Data The data for this study come from four sources. From the Center for Research in Security Prices (CRSP), I gather share prices, stock returns, market capitalizations, trading volumes, numbers of shares outstanding, first CRSP listing dates, and dividend yields of all publicly traded stocks listed in the NYSE, AMEX, and NASDAQ. The sample excludes non-ordinary shares (i.e., requires a CRSP share code of 10 or 11). I obtain daily and monthly risk-free rates from Kenneth Frenchs website.2 I collect balance sheet items from COMPUSTAT. I gather institutional ownership data for each stock for each quarter between March 1983 and December 2006 from the Thomson Financials CDA/Spectrum Institutional 13(f) Holdings (hereafter 13(f)) database. Institutional investment managers are required to use form 13(f) to report to the SEC if managers hold at least $100 million market value in equity. 3 Following previous work (e.g., Nofsinger and Sias (1999), Gibson, Safieddine and Sonti (2004)), I consider non-13(f) institutional investors as individual investors in

For detailed description of the Fama-French factors, please visit Kenneth Frenchs website, which is http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ 3 For more details, please see http://www.sec.gov/answers/form13f.htm
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this study. The final sample includes 486,655 security-quarter observations and the sample period starts in January 1983 and goes through December 2006. Following Bawa and Lindenberg (1977) and Ang, Chen and Xing (2006), I measure downside (upside) risk by downside (upside) beta i ( i+ ), which is estimated as the slope coefficient from a regression of an individual stocks daily excess returns on the excess returns on the value-weighted

portfolio of all NYSE, AMEX, and NASDAQ stocks conditional on a below-average (above-average) market return. I consider the market as a declining (improving) market when the market portfolios excess return is lower than (greater than or equal to) the average market excess return over the period. To estimate regular beta, downside beta and upside beta, I estimate the following regressions of daily individual stock returns on market portfolio returns for each 12-month rolling period updated monthly.
ri ,t = 0 + i rm ,t + i ,t
ri , t = 0 + i rm , t + i t , if rm , t < m , t , ri , t = 0+ + i + rm , t + i+ t , if rm , t m , t ,

(1) (2) (3)

where ri ,t denotes stock is excess return of the tth day in that period, rm, t is the excess return on the CRSP NYSE/AMEX/NASDAQ Value-Weighted Market Index of the tth day, i , i , and

i+ is the unconditional beta, downside beta, and upside beta of stock i, respectively, over that
12-month period, m, t is the average market excess return over that period. Each 12-month period, I require a stock to have a minimum of 240 daily returns in that period to be included in the sample. Estimated downside beta and upside beta are not independent of each other. Thus, to distinguish the influence of downside risk from the influence of upside risk, I define asymmetric

beta Asy i as the difference between downside beta and upside beta estimated over the same period.
Asy i = i i+

(4)

For each stock and for each quarter, I calculate fractional institutional ownership as the ratio of the number of shares owned by institutional investors to the total number of shares of this stock.4

IOi =

Numshare
l =1

i, l

Numsharei

, l =1,..., m, i = 1,..., n

(5)

where IOi represents the institutional investor holding level in stock i, Numsharei , l represents the number of stock is shares that are held by institutional investor l and Numsharei stands for the total number of stock is shares outstanding. Both Numsharei , l and Numsharei are measured at each quarter-end. For each quarter q, I merge institutional ownership data with the asymmetric beta data whose estimation period ends in the last month of quarter q. For example, institutional ownership data measured at the end of June 1986 are merged with asymmetric beta data estimated over the period July 1985 to June 1986. To avoid the influence of reporting errors, I exclude observations whose fractional institutional ownership is greater than one. Descriptive statistics of 486,655 firm-quarter observations over the period June 1983 to December 2006 are given in Table 1. [Insert Table 1 about here] Panel A of Table 1 reports the time-series average of the cross-sectional descriptive statistics of the institutional ownership data and panel B provides the average of the pooled asymmetric beta data. Panel B of Table 1 shows that the average downside beta is 0.81 whereas the average upside
4

13(f) data are available at quarterly frequency.

beta is 0.57. This result suggests that stocks returns, on average, covary more with the downside market returns than with the upside market movements. 3. Methodology and Empirical Results 3.1 Is there a link between asymmetric beta and institutional ownership? To examine if there is a substantial relation between asymmetric beta and institutional ownership, I start by analyzing the correlation between institutional fractional ownership and the level of asymmetric beta. For each quarter, I compute the cross-sectional correlations between asymmetric beta and fractions held by institutions within the same quarter. Then I calculate the time-series mean of the cross-sectional correlation coefficients. I apply the Newey and West (1987)s method to adjust the standard errors and report the corresponding t-statistics. Table 2 reports the time-series average of the cross-sectional correlations for 486,655 firm-quarter observations over the 95 quarters. [Insert Table 2 about here] The time-series average of the cross-sectional correlation coefficients between asymmetric beta and fractions held by institutional investors is -0.0730 and the associated Newey-West corrected t-statistic is -7.92. This significantly negative correlation coefficient indicates an inverse relation between institutional ownership and beta asymmetry. The average correlation coefficient between institutional ownership and regular beta is 0.3428. This significantly positive correlation is consistent with the findings of Bennett, Sias and Starks (2003). The average correlation coefficient between institutional ownership and upside beta is 0.2569, which is greater than that between institutional ownership and downside beta. This result suggests that institutional holding is more strongly correlated with upside potential than with downside risk.

Several studies provide empirical evidence that institutional holding levels are positively related to market capitalization of stocks (e.g., Gompers and Metrick (2001), Bennett, Sias and Starks (2003)). To control for this size effect, for each quarter, I sort stocks into five quintiles based on firms market capitalizations at the beginning of the quarter. Next, within each capitalization quintile, I further divide stocks into three groups based on the institutional holding level at the end of the quarter. I then calculate the average of asymmetric betas within each ownership group. If institutions are less willing to hold stocks with high asymmetric beta than individuals or institutional trading reduces beta asymmetry or individual trading increases beta asymmetry, then the high-institutional-ownership group should have lower level of beta asymmetry than the low-institutional-ownership group. Table 3 reports the time-series mean of the cross-sectional averages of asymmetric betas for portfolios sorted by market capitalization and then by institutional holding level. Within each capitalization quintile, I compare the time-series average of betas of the high-institutional-ownership group with that of the low-institutional-ownership group and report the associated F-statistics and p-value. I also run the paired t-test on the difference between average betas of the high-institutional-ownership group and those of the low-institutional-ownership group in parentheses. [Insert Table 3 about here] The first column of Table 3 describes the time-series average of the cross-sectional averages of asymmetric betas for the 15 capitalization-institutional-ownership groups. Groups with high institutional ownership have lower level of asymmetric betas than that of the

low-institutional-ownership groups in all market-capitalization quintiles. The differences between the averages of asymmetric betas of the high-institutional-ownership group and those of the low-institutional-ownership group are significantly negative in every quintile. The second to the fourth column of Table 3 reports the time-series average of regular beta, downside beta, and upside

10

beta,

respectively,

for

the

15

capitalization-institutional-ownership

groups.

The

high-institutional-ownership groups are associated with higher level of regular beta, downside beta, and upside beta, respectively, than that of the low-institutional-ownership groups for every quintile. The results presented in Table 3 confirm the correlation analysis in Table 2 and suggest that institutional investors are either less willing (than individual investors) to hold high beta asymmetric stocks or that institutional ownership cause a reduction in beta asymmetry (or, equivalently, individual investor ownership causes an increase in beta asymmetry). Next, I examine the impacts of asymmetric betas on contemporaneous institutional holding levels by running regressions of the fractions held by institutional investors, at firm level, for each quarter, on asymmetric betas and firm characteristics that are known to explain institutional ownership. I use eight firm characteristics that are similar to those used in previous studies (Gompers and Metrick (2001), Bennett, Sias and Starks (2003)): 1) Size: the natural logarithm of firm market capitalization as of the end of the current quarter. 2) Book-to-market ratio: the natural logarithm of the ratio of book equity for the fiscal year ending in year t to market capitalization at the end of December of year t. Following Fama and French (2006), I compute book equity for each firm and for each year. I use the book-to-market ratio of year t-2 for the quarters end in March of year t, and use the book-to-market ratio of year t-1 for the quarters end in June, September, and December. 3) Momentum: cumulative gross returns over the past six months before the beginning of the current quarter. 4) Price: the natural logarithm of one plus price per share at the end of the current quarter.

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5) Turnover: the natural logarithm of the sum of one and the average fractions of the total trading volume in each month within the current quarter divided by the number of total shares at the month-end in the current quarter. 6) Age: the natural logarithm of the number of months since first listed in the CRSP database. 7) Dividend yield: the natural logarithm of the cumulative dividend yield over the 12-month period ending in the current quarter. 8) Return volatility: the natural logarithm of the standard deviation of daily returns over the previous 24-month period. For each quarter between June 1983 and December 2006, I estimate the following cross-sectional regressions:
' IOi , q = 0, q + 1, q Asy i , q + q Ci , q + i , q

(6)

where IOi , q is the fractional institutional ownership at the end of quarter q, Asy i , q is the

estimated asymmetric beta whose estimation period is from the beginning of quarter q-3 to the end
' of quarter q, q is a vector of regression coefficients of Ci , q , the vector of the eight control

variables. Then I apply the Newey-West procedure to compute the time-series averages of

regression coefficients 1, q and the associated t-statistics. I also run regressions of fractional
institutional ownership on regular beta, downside beta, and upside beta, respectively, and the eight control variables. Table 4 presents the time-series average of the 95 cross-sectional regressions. On average, there are 5,123 firms in each cross-sectional regression. [Insert Table 4 about here] The first column of Table 4 shows that the time-series average regression coefficient of asymmetric betas is -0.0043, which is significantly different from zero at 1% level. This result

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suggests that, even after controlling variables that have explanatory power for institutional ownership, the inverse relation between beta asymmetry and institutional holding level remains intact. To control for the impacts of regular beta on institutional holding level (Bennett, Sias and Starks (2003)), I also regress fractional institutional ownership on both asymmetric beta and regular beta along with the control variables. The third cell of the second column of Table 4 is -0.0025 and the associated t-statistic is -2.31, which shows that the negative relation between beta asymmetry and institutional holding level still exists after controlling for the level of regular beta. The third column shows that the time-series average of regression coefficient of regular beta is 0.0411, which is significant at 1% level. This significantly positive coefficient confirms my correlation analysis results and is consistent with the findings of Bennett, Sias and Starks (2003). The fourth column and the fifth column of Table 4 indicate positive relations of institutional ownership with both downside beta and upside beta. The negative association between asymmetric beta and institutional holding level is consistent with two alternative explanations. First, the preference explanation states that institutional investors may have a stronger preference to less beta asymmetry than have individual investors so stocks with relatively higher institutional ownership would have lower beta asymmetry than stocks with relatively lower institutional ownership. Second, the trading-impact explanation argues that differences in individual and institutional investors behavior in rising and falling markets may cause the inverse relation. To differentiate between these two alternative yet not mutually exclusive stories, I further investigate the causality between asymmetric beta and institutional ownership. 3.2 Are institutional investors attracted to stocks with declining beta asymmetry? To address the research question whether or not institutional investors have a stronger preference to stocks with low asymmetric beta than individual investors do, I investigate the impact

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of lag changes in asymmetric beta on net institutional demand. For each quarter within the sample period, I estimate cross-sectional regressions of fractional institutional ownership measured at the end of the current quarter on lag changes in asymmetric betas and lag fractional institutional ownership. Because I estimate asymmetric betas on a 12-month basis, I use 12-month as the lag for the purpose of measuring changes in asymmetric betas and changes in institutional ownership. The regression is specified in equation (7).

IOi , q = 0, q + 1, q Asyi , q 4 + 2, q IOi , q 4 + i , q

where IOi , q and IOi , q 4

(7)

are the fractional institutional ownership measured at the end of

quarter q and q-4, respectively; Asy i , q 4 is the difference between the asymmetric beta of firm i
estimated over the period from quarter q-7 to q-4 and the asymmetric beta of firm i estimated over the period from quarter q-11 to q-8. For example, for institutional ownership measured at the end of June 1986, the dependent variable is the fractions held by institutional investors for all stocks that have both available institutional ownership data and asymmetric beta data from July 1983 to June 1986. The independent variables are the fractional institutional ownership measured at the end of June 1985, and the difference between betas estimated from July 1984 to June 1985 and betas estimated from July 1983 to June 1984. Table 5 reports the time-series average of the 91 cross-sectional regressions. On average, there are 4,156 firms in each cross-sectional regression. [Insert Table 5 about here] The first column of Table 5 reports that the average regression coefficient of lag changes in asymmetric beta is -0.0002, which does not significantly differ from zero. Inconsistent with the preference explanation, this result does not indicate that institutional investors have a stronger preference (aversion) to asymmetric beta than individual investors do. None of the regression coefficients of regular beta, downside beta, and upside beta are significantly different from zero.

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Thus, the results reported in Table 5 suggest that net institutional demand is not affected much by prior variations in asymmetric beta, regular beta, downside beta, and upside beta. 3.3 Does institutional trading cause a reduction in beta asymmetry? To examine if institutional trading and/or institutional presence contributes to a reduction in beta asymmetry, I analyze the relation between changes in asymmetric beta and lag changes in institutional ownership. For each quarter, I estimate cross-sectional regressions of asymmetric betas on lag asymmetric betas and lag changes in institutional ownership. For example, I regress asymmetric betas estimated over the period from July 1985 to June 1986 on asymmetric betas estimated over the period from July 1984 to June 1985, and the difference between the fractional institutional ownership measured at the end of June 1985 and that measured at the end of June 1984. The cross-sectional regression is specified as follows:

Asy i , q = 0, q + 1, q IOi , q 4 + 2, q Asy i , q 4 + i , q

(8)

where IOi , q 4 is the difference between IOi , q 4 and IOi , q 8 . Table 6 reports the time-series average of the coefficients of 91 cross-sectional regressions. On average, there are 4,676 firms in each cross-sectional regression. [Insert Table 6 about here] The first column of Table 6 shows that the average regression coefficient of lag changes in institutional ownership is -0.1275 and the associated Newey-West t-statistic is -2.56. This significantly negative coefficient suggests that an increase in fractional institutional ownership leads to a decrease in beta asymmetry, and vice versa. This result is consistent with the trading-impact explanation that institutional investors buy to a greater extent during an up market than they sell during a down market or individual investors sell to a greater extent during a down market than they buy during an up market. The second, third, and fourth column of Table 6 show that an increase in

15

the fractions held by institutional investors are followed by an increase in regular beta, downside beta, and upside beta, respectively. 3.4 Robustness Check In section 3.3, I estimate cross-sectional regressions of betas on lag betas and lag changes in

institutional ownership. For each quarter q, I estimate lag asymmetric beta Asy i , q 4 over the
period from quarter q-7 to q-4, and estimate lag changes in institutional ownership IOi , q 4 over the period from quarter q-7 to q-4. To control for potential influence of lag asymmetric beta on lag changes in institutional ownership during the overlapped estimation period, I replace the independent variable IOi , q 4 with IOi , q 8 , which is the difference between the fractional institutional ownership measured at the end of quarter q-8 and that measured at the end of quarter q-12. The cross-sectional regression is specified in equation (9).

Asy i , q = 0, q + 1, q IOi , q 8 + 2, q Asyi , q 4 + i , q

(9)

Table 7 reports the time-series average of the 91 cross-sectional regressions. On average, there are 4,676 firms in each cross-sectional regression. Consistent with my findings from section 3.3, the results of Table 7 show that the two-period lag changes in institutional ownership are significantly negatively associated with asymmetric betas, and positively related to regular beta, downside beta, and upside beta, respectively. [Insert Table 7 about here] Next, for each quarter within the sample period, I estimate cross-sectional regressions of asymmetric betas on lag changes in institutional ownership and two-period lag asymmetric betas. Equation (10) presents the form of the cross-sectional regression. Table 8 reports the time-series

16

average of the 91 cross-sectional regressions. On average, there are 4,131 firms in each cross-sectional regression.

Asy i , q = 0, q + 1, q IOi , q 4 + 2, q Asy i , q 8 + i , q

[Insert Table 8 about here]

(10)

The first column of Table 8 shows that the average regression coefficient of lag changes in institutional ownership is -0.1316, which is statistically significant at 5% level. This result is consistent with my hypotheses that institutional trading leads to opposite changes in asymmetric betas. Consistent with my findings in section 3.3, the rest of Table 8 shows positive relations between net institutional demand and changes in regular beta, downside beta, and upside beta, respectively. I use zero instead of m, t as the threshold for classifying the market into the down market and the up market. Thus, I consider the market is declining when rm, t < 0 and is rising when rm, t 0 . To conserve space, I do not report the specific results from this approach. The empirical results are qualitatively the same as the results if I use m, t . I also estimate regular beta, downside beta, and upside beta by regressing the individual stock returns on the Fama-French three factors (Fama and French (1993)) and the momentum factor (Carhart (1997)).5 The analysis results on the four-factor betas are not qualitatively different from the analysis results of betas estimated based on the market excess returns. To conserve space, the specific results on the four-factor betas are not reported in this paper. Next, I restrict my sample to NYSE stocks only because Ang, Chen and Xing (2006) use only NYSE stocks in their sample to avoid the influence of illiquid stocks. I rerun the empirical analysis following the same procedures used in section 3.1-3.3. In unreported results, I find that after
5

I obtain the market excess returns, SMB, HML, and UMD from Kenneth Frenchs website.

17

controlling for potential non-synchronous trading, the negative relation between asymmetric beta and institutional ownership remains intact. However, the impact of lag changes in institutional ownership on changes in asymmetric beta is weaker than that in the sample of all stocks. This may indicate that institutional investors are more likely to apply different trading strategies during declining and rising markets in small stocks than in large stocks. 1.5 Conclusions In this paper I explore the relation between institutional ownership and asymmetric beta. I show that fractional institutional ownership is inversely related to the level of asymmetric beta. Portfolios with high institutional ownership have lower average asymmetric beta than portfolios with low institutional ownership. I also examine the causality between institutional trading and asymmetric beta. Consistent with the trading-impact explanation, I find lag net institutional demand has negative impacts on asymmetric beta, while lag changes in asymmetric beta do not have significant influence on net institutional demand. My results suggest that institutional investors and/or individual investors use different trading strategies in a down market and in an up market. Specifically, institutional investors buy to a greater extent during an up market than they sell during a down market or individual investors sell to a greater extent during a down market than they buy during an up market. This paper is the first study to relate beta asymmetry to the difference between institutional investors and individual investors. My study helps to better understand the institutional and individual trading behavior in an up market and in a down market, and complements a mounting body of literature on the role of institutional investors in asset pricing.

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Table 1 Descriptive Statistics

The sample includes 486,655 security-quarter observations from June 1983 to December 2006. Panel A reports the time-series average of cross-sectional sample statistics for the number of institutional shareholders in a firm, the fractions of shares held by institutional investors, and the number of firms that have institutional holdings per quarter. Panel B reports the average of pooled data of asymmetric beta, regular beta, downside beta, and upside beta. Panel A: Institutional Investors Mean # of institutional shareholders in a firm Institutional holdings as a % of total shares # of firms with institutional holdings per quarter 65 30.5% 5123 Median 22 23.9% 4994 Minimum 1 0.0% 3854 Maximum 1493 100.0% 6472 Std. Dev. 110 25.9% 700

Panel B: Betas Mean Asymmetric Beta ( Asy i ) Regular Beta ( i ) Downside Beta ( i ) Upside Beta ( i+ ) 0.24 0.68 0.81 0.57 Median 0.17 0.60 0.74 0.52 Minimum -39.28 -10.44 -29.34 -27.08 Maximum 33.29 10.42 24.60 30.60 Std. Dev. 1.20 0.64 0.93 1.04

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Table 2 Correlation Coefficients between Asymmetric Betas and Institutional Holdings

This table reports the time-series averages of the cross-sectional correlation coefficients of fractions held by institutional investors with asymmetric beta, regular beta, downside beta, and upside beta, respectively. I compute the cross-sectional correlations for each quarter. The average number of stocks per quarter is 5,122. The Newey-West (Newey and West (1987)) corrected t-statistics are reported in parentheses.

Asy i
Institutional holdings as a % of total shares -0.0730 (-7.92)*** *** indicates statistically significant at 1% level.

i
0.3428 (21.07)***

i
0.1941 (12.59)***

i+
0.2569 (16.40)***

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Table 3 Asymmetric Betas Sorted by Market Capitalizations and Institutional Holding Levels

For each quarter within the sample period (June 1983 to December 2006), I sort stocks that have institutional holdings into five quintiles based on firms market capitalizations at the beginning of the quarter. Within each capitalization quintile, I further divide stocks into three groups based on the institutional holding level of the end of the quarter. Next, within each ownership group, I then compute the time-series average of cross-sectional average of asymmetric beta, regular beta, downside beta, and upside beta. This table reports the time-series means for 486,655 security-quarter observations over the 95 quarters. Within each capitalization quintile, I compare the time-series average of betas of high-institutional-ownership group with that of low-institutional-ownership group and report the associated F-statistics and p-value. I also report the difference between average betas of high-institutional-ownership group and those of low-institutional-ownership group in parentheses. Market capitalization Institutional ownership Low Medium High F-stat Paired t-stat Low Medium High F-stat Paired t-stat Low Medium High F-stat Paired t-stat Low Medium High F-stat Paired t-stat Low Medium High F-stat Paired t-stat

Asy i
0.3074 0.2937 0.2689 (3.26)** (-2.71)*** 0.3286 0.3298 0.3026 (5.83)*** (-2.17)** 0.2987 0.2981 0.2689 (10.21)*** (-2.06)** 0.2251 0.2157 0.1748 (40.13)*** (-4.32)*** 0.0652 0.0457 0.0309 (24.14)*** (-3.63)***

i
0.3270 0.3547 0.3710 (31.07)*** (5.75)*** 0.4509 0.5192 0.5332 (175.14)*** (6.57)*** 0.6877 0.7589 0.7796 (175.14)*** (7.60)*** 0.8071 0.9063 0.9500 (453.82)*** (9.99)*** 0.8470 1.0140 1.0801 (175.14)*** (14.39)***

i
0.4993 0.5196 0.5201 (2.81)* (1.63) 0.6225 0.6934 0.6915 (55.04)*** (4.37)*** 0.8395 0.9128 0.9138 (76.25)*** (4.26)*** 0.9203 1.0127 1.0346 (187.11)*** (6.14)*** 0.8877 1.0378 1.0895 (940.47)*** (12.57)***

i+
0.1920 0.2258 0.2512 (10.82)*** (4.17)*** 0.2939 0.3636 0.3889 (67.88)*** (7.62)*** 0.5407 0.6146 0.6449 (105.47)*** (7.82)*** 0.6952 0.7970 0.8598 (333.17)*** (12.02)*** 0.8225 0.9920 1.0586 (1004.68)*** (14.26)***

Small

Quintile 2

Quintile 3

Quintile 4

Large

** indicates statistically significant at 5% level. *** indicates statistically significant at 1% level.

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Table 4 Regression Analysis of Institutional Ownership on Asymmetric Betas

For each quarter within the sample period (June 1983 to December 2006), I run cross-sectional regressions of fractional institutional ownership on asymmetric beta, regular beta, downside beta, upside beta, respectively, and eight control variables. The control variables include: size, BM (book-to-market ratio), price, turnover, age, dividend yield, return volatility, and momentum. This table reports the time-series mean of the 95 cross-sectional regressions. On average, there are 5,122 firms in each cross-sectional regression. The Newey-West corrected t-statistics are reported in parentheses. Independent Variables Intercept -0.5717 (-36.67)*** -0.0043 (-4.05)*** -0.5535 (-35.88)*** -0.0025 (-2.31)** 0.0412 (7.58)*** 0.0411 (7.53)*** 0.0137 (5.09)*** 0.0170 (5.63)*** Size BM Price Turnover Age Dividend Return Volatility Momentum 0.0650 (25.78)*** 0.0302 (15.94)*** 0.0670 (17.91)*** 0.0481 (12.69)*** 0.0105 (5.96)*** -1.0450 (-10.56)*** 0.0385 (5.30)*** -0.0480 (-12.13)*** 0.0586 (26.07)*** 0.0303 (15.90)*** 0.0633 (17.76)*** 0.0403 (11.17)*** 0.0112 (6.59)*** -1.0060 (-10.24)*** 0.0210 (3.46)*** -0.0434 (-13.51)*** 0.0588 (26.11)*** 0.0304 (15.94)*** 0.0630 (17.68)*** 0.0397 (11.00)*** 0.0113 (6.56)*** -1.0072 (-10.24)*** 0.0203 (3.37)*** -0.0436 (-13.6)*** 0.0633 (26.55)*** 0.0302 (16.41)*** 0.0654 (17.79)*** 0.0443 (12.25)*** 0.0108 (6.03)*** -1.0378 (-10.45)*** 0.0312 (4.80)*** -0.0472 (-12.67)*** 0.0623 (27.48)*** 0.0303 (15.57)*** 0.0656 (18.14)*** 0.0456 (12.47)*** 0.0107 (6.35)*** -1.0291 (-10.42)*** 0.0316 (4.78)*** -0.0458 (-13.11)*** -0.5569 (-35.95)*** -0.5745 (-37.69)*** -0.5617 (-36.76)***

Asy

** indicates statistically significant at 5% level. *** indicates statistically significant at 1% level.

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Table 5 Regression Analysis of Institutional Ownership on Lag Changes in Asymmetric Betas and Lag Institutional Ownership

For each quarter within the sample period (June 1984 to December 2006), I run cross-sectional regressions of fractional institutional ownership on lag changes in asymmetric beta, regular beta, downside beta, and upside beta, respectively, and lag fractional institutional ownership. This table reports the time-series mean of the 91 cross-sectional regressions. On average, there are 4,156 firms in each cross-sectional regression. The Newey-West corrected t-statistics are reported in parentheses. Independent Variables Intercept 0.0297 (14.07)*** 0.0298 (13.86)*** 0.0298 (13.95)*** 0.0297 (14.03)***

Asy q 4 q 4

q4

-0.0002 (-0.87) -0.0005 (-0.45) -0.0005 (-1.57)

+ q4

0.0000 (-0.03)

IOq 4

0.9366 (112.27)***

0.9362 (109.84)***

0.9365 (111.45)***

0.9366 (111.1)***

*** indicates statistically significant at 1% level.

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Table 6 Regression Analysis of Asymmetric Beta on Lag Changes in Institutional Ownership and Lag Asymmetric Beta

For each quarter within the sample period (June 1984 to December 2006), I run cross-sectional regressions of asymmetric betas on lag changes in institutional ownership and lag asymmetric betas. I also run similar regressions of regular betas, downside betas and upside betas, respectively. This table reports the time-series means of the 91 cross-sectional regressions. On average, there are 4,676 firms in each cross-sectional regression. The Newey-West corrected t-statistics are reported in parentheses. Dependent Variables

Asy q
Intercept 0.2098 (8.15)***

q
0.2951 (16.32)***

q
0.5576 (20.27)***

q+
0.4116 (18.64)***

Asy q 4

0.0473 (5.88)***

q4
q 4 q+ 4
IOq 4
-0.1275 (-2.56)** ** indicates statistically significant at 5% level. *** indicates statistically significant at 1% level.

0.5651 (19.68)*** 0.3036 (14.37)*** 0.2678 (9.37)*** 0.4866 (10.06)*** 0.4867 (8.21)*** 0.6565 (9.73)***

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For each quarter within the sample period, I run cross-sectional regressions of asymmetric betas on two-period lag changes in institutional ownership and lag asymmetric betas. I also run similar regressions of regular betas, downside betas and upside betas, respectively. This table reports the time-series means of the 91 cross-sectional regressions. On average, there are 4,676 firms in each cross-sectional regression. The Newey-West corrected t-statistics are reported in parentheses. Dependent Variables

Table 7 Regression Analysis of Asymmetric Beta on Two-Period Lag Changes in Institutional Ownership and Lag Asymmetric Betas

Asy q
Intercept 0.2042 (8.10)***

q
0.2987 (16.09)***

q
0.5599 (20.13)***

q+
0.4179 (18.71)***

Asy q 4

0.0471 (5.79)***

q4 q 4 q+ 4
IOq 8
-0.1446 (-3.34)*** *** indicates statistically significant at 1% level.

0.5700 (19.46)*** 0.3047 (14.14)*** 0.3392 (9.39)*** 0.1349 (4.78)*** 0.2204 (4.33)*** 0.2707 (7.55)***

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Table 8 Regression Analysis of Asymmetric Beta on Lag Changes in Institutional Ownership and Two-Period Lag Asymmetric Betas

For each quarter within the sample period, I run cross-sectional regressions of asymmetric betas on lag changes in institutional ownership and two-period lag asymmetric betas. I also run similar regressions of regular betas, downside betas and upside betas, respectively. This table reports the time-series mean of the 91 cross-sectional regressions. On average, there are 4,131 firms in each cross-sectional regression. The Newey-West corrected t-statistics are reported in parentheses. Dependent Variables

Asy q
Intercept 0.2025 (8.07)***

q
0.3363 (17.10)***

q
0.5763 (20.82)***

q+
0.4333 (17.44)***

Asy q 8

0.0447 (5.36)***

q 8
q8 q+8
IOq 4
-0.1316 (-2.54)** ** indicates statistically significant at 5% level. *** indicates statistically significant at 1% level.

0.5102 (18.75)*** 0.2772 (12.99)*** 0.2452 (11.53)*** 0.6624 (10.07)*** 0.5418 (7.99)*** 0.6835 (8.25)***

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