Abstract
We test the hypothesis that investment constraints in delegated portfolio management may distort demand for stocks, leading to price underreaction to news and stock return predictability. We find that institutions tend not to buy more of a stock with good news that they already overweight; they are reluctant to sell a stock with bad news that they already underweight. Stocks with good news overweighted by institutions subsequently outperform significantly stocks with bad news underweighted by institutions. The impact of institutional investment constraints shed new lights on asset pricing anomalies such as stock price momentum and post earnings announcement drift.
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