Institutional Demand and Security Price Pressure: The Case of Corporate Spinoffs
Keith C. Brown
W. V. Harlow (a.k.a. Bryce A. Brooke)
Financial Analysts Journal 49, 1993, pp. 53-62
The significant presence of institutional investors in today’s capital markets suggests that the objectives and constraints of these participants can dramatically affect the behavior of security prices. This paper tests the hypothesis that the need for institutional investors to rebalance their portfolios by liquidating newly created corporate spinoff shares generates a substantial, although temporary, selling pressure in these securities. A sample of 74 publicly traded spinoffs over the period from January 1980 to April 1990 demonstrates that, on average, the initial decline in the spinoff firm’s stock price is significantly related to the degree to which institutions divest their shares in the firm. Block trades by institutional investors create the largest movements in value. The price pressure for institutional sales appears to be a function of parent and spinoff-firm characteristics that proxy for the investment restrictions faced by institutions.
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