Institutional Investors and the Beta Anomal

I investigate the impact of institutional ownership on the beta anomaly and find that the beta anomaly is concentrated in stocks with high institutional ownership. Further examination shows that only ownership from short-term institutional investors exacerbates the beta anomaly. I consider several explanations and find that: (i) stocks with greater short-term institutional ownership have higher arbitrage costs; (ii) trading of short-term institutional investors leads to the reversal of the beta anomaly; (iii) short-term institutional investors are more responsive to earnings. These results provide evidence that institutional investment horizons play an important role in explaining the beta anomaly.