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Rev Fin 2003; 16:1203-1238
© 2003 the Society for Financial Studies

Greener Pastures and the Impact of Dynamic Institutional Preferences

James A. Bennett
University of Massachusetts Boston

Richard W. Sias
Washington State University

Laura T. Starks
University of Texas

Address correspondence to Richard Sias, Department of Finance, Insurance, and Real Estate, College of Business and Economics, Washington State University, Pullman, WA 99164-4746.

Abstract

Although institutional investors have a preference for large capitalization stocks, over time they have shifted their preferences toward smaller, riskier securities. These changes in aggregate preferences have arisen primarily from changes in the preferences of each class of institution, rather than changes in the importance of different classes. Evidence also suggests that recent growth in institutional investment combined with this shift in preferences helps explain why markets in general, and smaller stocks in particular, have exhibited greater firm-specific risk and liquidity in recent years. Additional analyses suggest that institutional investors moved toward smaller securities because such securities offer "greener pastures."


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