Breadth of Ownership and Stock Returns

Abstract

This book focuses on the forecasting power of breadth of ownership of Portuguese mutual funds on stock returns. Majority of studies tend to focus on the markets of China and the United States. We utilize a model with differences of opinion and short-sales constraints similar to that of Chen et al. (2002). Using data on mutual fund holdings we find that stocks with the largest negative changes in breadth tend to significantly underperform stocks with the largest positive changes in breadth in short horizons of one month and one quarter. However, the results are mixed when looking at longer horizons. We also find evidence to show that short-sales constraints matter for stock returns. Therefore, when short sales constraints are binding stocks prices are high when compared to fundamentals. This proves that our results are consistent with the Miller (1977) model. Further, we show that are results hold during periods of a financial crisis as well. This study also highlights that there are limits to arbitrage, as suggested by Shleifer and Vishny (1997), because of market frictions such as short-sales constraints which can lead to abnormal returns in constraint stocks.