The Impact of Institutional Ownership on Stock Valuation

—This paper studies the relationship between institutional ownership and firm valuation. Using a panel data of all listed companies in the United States from 1980 to 2016, I find that firm valuation increases with the level of and the change in institutional ownership, both in the cross-section within an industry and in the time-series within a firm. Specifically, when institutional ownership increases by 1%, firm valuation increases by 0.413% in the cross section and 0.418% in the time-series. Additionally, breaking the sample into a period with an overall growth in institutional ownership in the market (1980–2005) and that with stable institutional ownership (2006–2017), I find that the relationship is stronger during the period with growing institutional ownership than afterwards. Additionally, the marginal increase of institutional ownership led to a faster positive movement of firm valuation. When the changes of institutional ownership increase by 1 percent, firm valuation would increase by 0.544% in the cross section and 0.569% in the time-series over the whole sample period. These results potentially suggest that the behavior of institution investors lay positively impact on the firm valuation. Institution investors tend to grab more information on the market and are more professional in analyzing the firms, which could also be the reason for the herding behavior of individual investors.