Institutional Demand and Security Price
Pressure: The Case of Corporate Spinoffs
Keith C. Brown
W. V. Harlow (a.k.a. Bryce
A. Brooke)
Financial Analysts Journal 49, 1993, pp. 53-62
The significant presence of institutional investors
in today’s capital markets suggests that the objectives and constraints
of these participants can dramatically affect the behavior of security
prices. This paper tests the hypothesis
that the need for institutional investors to rebalance their portfolios by
liquidating newly created corporate spinoff shares
generates a substantial, although temporary, selling pressure in these
securities. A sample of 74 publicly
traded spinoffs over the period from January 1980 to
April 1990 demonstrates that, on average, the initial decline in the spinoff firm’s stock price is significantly related
to the degree to which institutions divest their shares in the firm. Block trades by institutional investors
create the largest movements in value.
The price pressure for institutional sales appears to be a function of
parent and spinoff-firm characteristics that proxy
for the investment restrictions faced by institutions.
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