TWO ESSAYS ON INSTITUTIONAL INVESTORS

Thesis (Ph.D.), Department of Finance and Management Science, Washington State UniversityThis dissertation consists of two separate yet related chapters that study the role of institutional investors in the financial market by investigating the relations between two risk-related firm characteristics and institutional trading.In chapter one, I examine the relation between ownership by institutional versus individual investors and beta asymmetry (the difference between downside beta and upside beta). I find beta asymmetry is negatively associated with institutional ownership. This inverse relation may be explained by two alternative hypotheses. First, institutional investors may be less willing (than individual investors) to hold stocks with high asymmetric beta (the preference explanation). Second, differences in individual and institutional investors' behavior in rising and falling markets cause beta asymmetry (the trading-impact explanation). The results from my analysis of the causality between net institutional demand and changes in asymmetric beta are consistent with the trading-impact explanation, and indicate that institutional investors buy to a greater extent during an up market than they sell during a down market.In chapter two, I use closed-end funds to explore whether institutional investors are a stabilizing or destabilizing force in the market. If institutional investors tend to drive prices towards fundamental values, then they should purchase closed-end funds selling at a wide discount and sell funds selling at a large premium. Consistent with the hypothesis that institutions drive prices toward fundamental values, I document that wide-discount funds experience a higher subsequent institutional demand than premium funds do. Moreover, I find that an increase in institutional ownership forecasts a decrease in the volatility of discounts. In sum, my evidence suggests that institutional investors play a price-stabilizing role in financial markets.Department of Business, Washington State Universit