This paper is co-authored with Karen Schnatterly and Kenneth Shaw, both of the University of Missouri. It is abstracted on SSRN.
ABSTRACT: We study the relation between the percentage of outstanding shares held by a firm's largest institutional owner and the bid-ask spread on that firm's shares, a measure of information risk. We find that the greater the percentage of shares held by the largest institutional investor, the greater the bid-ask spread in share prices. In contrast, the percentage of shares held by smaller institutional owners is related to lower bid-ask spreads. The results imply that only the largest of a firm's institutional owners — and no other institutional owner — is perceived to hold an information advantage.
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