Changes in Ownership Breadth and Capital Market Anomalies

  • Yangru Wu and Weike Xu
  • Journal of Portfolio Management
  • A version of this paper can be found here
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What are the Research Questions?

Can the returns from running factor strategies be enhanced if institutional investors selectively and actively participate? Most of the evidence presented in this paper would suggest the answer is an unqualified YES. The authors argue this would require institutional investors to possess and then capitalize on private information. Consequently, the movement into and out of specific stock positions would provide signals to investors about future price changes.  The empirical analysis focuses on determining how changes in ownership breadth measured by the entries and exits of institutional investors work with anomalous equity signals. The universe included all of the NYSE/AMEX/NASDAQ equities available from May 1981 to May 2018. Financials and equities with a share price lower than $1 were excluded. Fama-French risk adjustments were made throughout.

  1. What is the relationship between changes in the breadth of ownership and the performance of each leg of 11 anomalies (asset growth, failed probability, gross profitability, investment asset, long-term equity issuance, momentum, net operating assets, net payout, net stock issuance, operating accruals, o-score, return on assets) studied?
  2. Can the information on the entries and exits of informed investors be used to improve the performance of anomalies?

What are the Academic Insights?

  1. In general, the return performance if the long legs of anomalies are more positive after informed institutional investors enter the trade. The longs produced an average monthly return of 26 bps for the top changes in breadth tercile, compared to only 11 bps for the original anomalies.  A similar pattern was exhibited by the short legs which are more negative after exiting the trade at -59bps compared to -17 bps for the original anomalies. An examination of Exhibit 3 (Panels A and B) provides more performance detail on long and short legs vs high and low changes in ownership breadth.  On average for the 11 anomalies, excess returns from the long side for the high group (26 bps) exceeded that of the low group (-14 bps) and were statistically significant on average.  Seven of the 11 spreads from the individual strategies were also significant.
  2. YES. The authors constructed an “enhanced” strategy consisting of buying stocks on the long side of the anomalies and simultaneously in the top change of breadth.  Stocks are shorted if on the short leg of the anomalies and at the bottom of the changes in breadth at the same time.  The average return of the enhanced strategies was 67 bps monthly, indeed outperforming the original anomalies returning 41 bps. The Sharpe ratio was .49 for the enhanced strategy compared to .37 for the original anomalies. On average, the 11 enhanced anomalies earn a significant average return of 67 bps per month, an improvement of 28 bps per month from the mean return of the original anomalies—a substantial increase. The enhanced strategy delivered an average annualized Sharpe ratio of 0.49, substantially higher than that of the original anomalies of 0.37.   Depending on the anomaly examined the range of returns or spreads varied widely, from a low of 19 bps monthly for failure probability to 54 bps for operating accruals.

Why Does it Matter?

Based on the findings of the enhanced strategies, this research documents significant outperformance when compared to the traditional long/short anomaly results.  Over the entire sample of 11 anomalies, the enhancement more than doubled the Fama-French excess returns (70 bps per month vs.  28 bps).  It appears that informed institutional investors have exploitive information that drives their trades both in and out of equity positions powerful enough to predict changes in equity prices.

The Most Important Chart from the Paper

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained.  Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.


The authors investigate how the interaction between entries and exits of informed institutional investors and market anomaly signals affects strategy performance. The long legs of anomalies earn more positive alphas following entries, whereas the short legs earn more negative alphas following exits. The enhanced anomaly-based strategies of buying stocks in the long legs of anomalies with entries and shorting stocks in the short legs with exits outperform the original anomalies, with an increase of 19–54 bps per month in the Fama–French five-factor alpha. The entries and exits of institutional investors capture informed trading and earnings surprises, thereby enhancing the anomalies.

About the Author: Tommi Johnsen, PhD

Tommi Johnsen, PhD
Dr. Tommi Johnsen was a past Director of the Reiman School of Finance and a tenured faculty at the Daniels College of Business at the University of Denver. She has worked extensively as a consultant and investment advisor in the areas of quantitative methods and portfolio construction. She taught at the graduate and undergraduate level and published research in several areas: capital markets, portfolio management and performance analysis, financial applications of econometrics, and the analysis of equity securities. Her publications have appeared in numerous peer-reviewed journals.