Jawook Baek

Date of Award

Summer 1997

Document Type


Degree Name

Doctor of Business Administration (DBA)


Economics and Finance

First Advisor

Roger Shelor


The purpose of this study is threefold: (1) To evaluate how the portfolio performance of institutional investors differs from the market index portfolio, first, as a whole, and second, as several different institutional ownership portfolios. (2) To investigate the relationship between the institutions' superior stock selection ability and firm quality attributes such as beta, volatility, firm size, and R&D expenditures. Most previous academic work has focused on institutional investment behaviors, finding the relationship between institutional ownership and firm quality attributes, based on only mutual funds. (3) To develop a decision model for future institutional investors' portfolio performance based on the explanatory variables used in this study. The dependent variable is portfolio gross return, and firm quality attributes are independent.

The study group is selected from firms listed on the Compact Disclosure database during the period Jan. 1989-Dec. 1996. Approximately 8,000 NYSE, AMEX, and NASDAQ companies are employed in this study. As analytical tools, Sharpe's measure (1966), Jensen's alpha measure (1968), and Jobson and Korkie's Z-statistic (1981) are used.

From the results of the study, one may conclude that institutional investors as a whole are not superior stock selectors, however, specific institutional ownership portfolios performed in a superior manner. The institutions' superior selection ability is partly related to such firm quality attributes as small firm and stock volatility effects. Previous studies find that institutional ownership is related to firm size; however, institution's portfolio performances are found to be inversely related to size. Higher beta is not found to contribute to institutions' superior portfolio performance. This study found that institutional investors act in a hyperopic manner when tested with R&D expenditures. However, amounts of a firm's R&D expenditures are inversely related to institutions' superior performance. Unexpectedly, stock volatility is found to contribute to institutions' portfolio excess returns, based on Jensen's measure.

Finally, all firm quality attributes employed in this study as explanatory variables appear to be significantly related to portfolio returns. All variables are positively related to portfolio gross returns except R&D, which is inversely related.