Determinants of Relative Investor Demand for Common Stocks

This paper examines the demand for a firm’s common stock by wealthy relative to less wealthy individual investors and by indi-vidual relative to institutional investors as a finction of risk, in-formation environment (proxied by firm size and S&P 500 membership), and form of return payout (i.e., dividends versus cap-ital gains). The findings indicate that among individual investors demand for the stocks of riskier, larger, and low-dividend-yield firms increases with wealth. The findings also suggest that relative to individual investors, institutional investors prefer the stocks of larger firms, S&P 500 firms, and firms paying low dividend yields. Overall, these results suggest that investors find a number of jirm-specijic factors important in their investment choices and that the importance of such factors varies systematically with investor size. Studies in financial economics often ask the question of what, if any, firm-specific attributes other than risk and expected (before-tax) return in-fluence aggregate demand (i.e., price) for a firm’s stock. This paper asks a different, but related, question: what firm-specific attributes influence rela-tive demand among investor types for a firm’s stock? A knowledge of factors influencing relative demand is important for at least two reasons. First, relative demand preferences can translate into aggregate demand ef-fects. Harris and Gurel (1986). for example, find that because institutional investors, particularly stock index funds, prefer S&P 500 firms as invest-ments, the stock price of a firm increases (decreases) if the firm is added to (dropped from) the S&P 500. Thus, a relative preference on the part of institutional investors for S&P 500 firms appears to influence aggregate demand. For a summary of similar arguments relating to dividend tax cli