money
Institutional investors who actively smart money manage portfolios invest billions of dollars annually to buy and analyze information to uncover mispriced securities. Empirical evidence of the value created by this active portfolio management is controversial. For instance, analyses of mutual fund returns after transaction costs, management fees, and other charges usually do not show evidence of better performance.
Grinblatt and Titman 1989, Grinblatt and Titman 1993 do, however, discover evidence for excess gross returns of mutual funds and attribute their findings to being at least partly the result of active portfolio management strategies. Non-mutual fund institution returns have also been researched, albeit not as fully. For example, Lakonishok et al. examine pension fund returns and find that active management by the portfolio managers of the pension fund did not provide any more returns over a buy-and-hold strategy.
Empirical evidence regarding the value added to the active smart money management portfolio management also arises from research on institutional trading after initial public offerings. Hanley and Wilhelm report that institutions buy a relatively stable proportion on the order of 70% of the shares made available in IPOs, but Field observes substantial variation in the proportion of outstanding shares owned by institutions roughly six months after the offer date.
Collectively, these findings indicate that institutions have strong disagreements across IPOs regarding valuations and act on these disagreements in the IPO aftermarket by purchasing or selling substantial stakes to individual investors, i.e., smart money finance, mini money management, smart money, economist management, latest management non-institutional investors.
In line with institutions being successful at their IPO stock selection, Field discovers that those IPOs that had high institutional ownership fared better over three years following the IPO compared to those with minimal or no institutional ownership. Krigman et al. offer further evidence that indicates institutions either have access to information that is not available to individual investors at the time of the IPO or utilize publicly available information more effectively. They discover that IPOs with intense institutional first-day selling, or flipping, do worst in the ensuing year.
Explanation
No other smart money management activity in a firm’s life, except for its IPO, is marked by so high a level of information revelation. The SEO is preceded by a concerted effort on the part of a firm’s management and investment bankers to communicate its tale to external investors. The prospectus, road show, and conference calls constituting the firm’s and underwriter’s SEO marketing strategy give outside investors unprecedented opportunities to communicate with firm management and even sell-side analysts who are part of the underwriting team.
We examine whether institutional investors can leverage this greater access into an information advantage over individual investors. If institutional portfolio managers are more knowledgeable or have greater selectivity, we would want smart money them to be able to differentiate between potentially better-performing SEO firms and those likely to perform worse in the aftermarket. If so, smart money management tips. smart ways manage money, budget money smart, money smart budget app, money smart budget tool issuers in which institutional holdings expand near the time of the issue should substantially outperform issuers in which institutional investors reduce holdings. We empirically examine these questions by analyzing institutional ownership changes around 2,912 SEOs that occurred between 1980 and 1994.
Various advantages to make smart money
We have evidence that, on average, institutions made smart money management much larger investments in SEO firms than in the control sample of matched non-issuers. Institutions did not seem to be worried by the disputed empirical evidence of post-issue underperformance of SEO firms, prima facie. This inference, however, assumes that smart money institutions lack stock selection ability. Maybe institutions were able to distinguish the SEO firms with above-average performance from the genuinely underperforming ones and changed their trading behavior among SEOs accordingly.
A fascinating pattern is observed when we impose a foresight bias on institutional investors and analyze the connection between institutional investment changes and post-issue stock market performance of SEO companies. We discover that issuers seeing the most growth in institutional investment near the offer date performed better on their benchmark portfolios during the ensuing year by a statistically and economically significant amount compared to those seeing the most decline. Conversely, we discover no such trend within the control sample smart money of matched non-issuers.
The positive one-year stock market performance of SEO firms that are institutionally heavily purchased persists, and we uncover no evidence of reversals of returns during the subsequent two to five years after the offer. We discover this capacity to identify issuers that perform better after the SEO compared to those that perform worse to be robust and statistically SEO significant across classes of institutions.
To test the hypothesis that our findings are due to a size effect rather than an ability of institutions to pick winners from among SEO firms, we consider small and large capitalization stocks in our sample separately. McLaughlin et al.. and Brav et al.. conclude that small stocks underperform more than large stocks after smart money SEOs. Considering the evidence of institutions’ propensity to hold large quantities, we test the hypothesis that our findings are merely an expression of institutions acquiring a larger proportion of large-firm SEOs, which, as it happens, perform relatively better than small-firm ones.
SEO firms
Our final sample of 2,912 SEO performed between 1980 and 1994 was acquired as follows. We received from Securities Data Corporation an initial sample of 3,848 initial SEOs that occurred during the period 1980-1994. We set 1980 as the initial year for the sample because our institutional holdings data start in 1979. This enables us to have at least one quarter of holdings before the earliest SEO date in the sample.
We now take a closer look at the institutional investment pattern in smart money SEO companies around an offer. We first classify the sample of latest SEO companies into quintiles based on the rise in institutional holdings around the offer. We define the lowest, middle three, and highest quintiles as low, moderate, and high institutional-buying stocks, respectively.
Conclusion
Most empirical evidence has evaluated the value added by active smart money management institutional portfolio management through a comparison of the returns on institutional portfolios with pre-specified benchmarks. We pursue a different strategy, akin to earlier research involving institutional trading in IPOs. We analyze the value-adding character of institutional portfolio management through the observation of the trading activity rather than the performance of institutional portfolio management.
We find that established equity issuers with the highest smart money rise in institutional investment at the offer date performed better than their benchmark portfolios during the subsequent year by a statistically and economically significant amount compared to those with the highest fall. There is no such link for a control sample of matched non-issuers.
Issuers with the highest institutional investment smart money also have the highest proportion of sell-side analyst upgrades minus downgrades over total predictions during the two quarters after issue. Once again, no such relation is established for matched non-issuers. We interpret our results as proof that institutions can spot above-average seasoned equity offering latest SEO tools invent concern at the time of equity granting and increase their stock in these potential outperformers.