Institutions and the book-to-market effect: The role of investment horizon

Abstract

In this study, we investigate the differential contribution of institutions with different investment horizons in the book-to-market effect. We find that long-horizon institutions tend to buy (sell) stocks with positive (negative) past intangible information. This behavior exacerbates market overreaction and magnifies intangible return reversals, thus contributing to the book-to-market effect. On the other hand, short-horizon institutions trade independent of intangible information, and their trading in the direction of intangible information does not contribute to the book-to-market effect. Moreover, our findings also support that short-horizon institutions are better informed than long-horizon institutions.