The influence of heterogeneous expectations on security prices
Charles W. Harrington
Purpose – The purpose of the study was to provide empirical support for the Miller model. The paper proposes the use of the ratio of individual to institutional holdings as a proxy for heterogeneous expectations of security returns. Design/methodology/approach – Both bivariate t-tests and regression analysis were used to test whether optimistic valuations existed for stocks with high levels of institutional ownership. Data on open short positions were collected and hypothesized to decrease with the level of institutional holdings. High ratio stocks were compared to glamor stocks and low ratio stocks to value stocks. Findings – For stocks with higher institutional ownership, optimistic valuations dominated resulting in significantly lower future security returns than for stocks with higher individual ownership thereby supporting the Miller model. The results were not sensitive to variations in size, momentum, and book-to-market ratios. Further support for the Miller model was provided by the finding that open short positions decreased with the level of institutional holdings. High ratio stocks resembled glamor stocks and low ratio stocks corresponded to value stocks. Research limitations/implications – This study is limited to the ultra-short term period of one month after portfolio creation. Future research should extend it to the three-to-five year time horizon. Practical implications – Ultra-short term investors should hold value stocks, intermediate three-12 month investors should hold glamor stocks, and long-term investors should hold value stocks. Originality/value – The finding of a new proxy for heterogeneous expectations. The paper also establishes a new methodology for testing the Miller model.
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