My research broadly addresses the behavior and impact (intended or unintended) of institutional investors. Institutional investors are an important class of investors for several reasons. First, institutional investors control an increasing majority of financial assets. Mutual funds, which hold individual’s assets, are ultimately controlled by the mutual fund manager, who is a professional. Hedge funds, insurance companies, and pension funds — all of these are run by institutional investors. By way of contrast, an individual trading stocks at home with a personal brokerage account is not an institutional investor.
More specifically, my research investigates institutional investors and their effect on price efficiency in financial markets. This agenda stems from a paradox, described in Stein (2009):
1. Institutional investors are supposed to be sophisticated.
2. Institutional investors are growing as a % of market participants.
3. Thus, more sophisticated investors should imply better, more efficient pricing (i.e. less noise, irrational behavior). Yet,
4. We do not observe this. Why?
There are indeed many people addressing this puzzle, and the ‘answer’ is not likely to be singular. But this is the unifying thread of my research. In particular, my research falls into the following four groups under this broader umbrella. While these groups are a helpful categorization, they are not necessarily distinct.