A Financial Profile of Firms Favored by Institutional Investors

For years institutional investors have concentrated their holdings of common stock in a relatively small group, the “institutional favorites.” While the market performance and changes in the composition of institutional favorites were reported in financial literature from the 1950s, no recent studies concerning the characteristics of firms classified as institutional favorites have been presented. The purpose of this study is to establish a financial profile for firms currently favored by financial institutions, and to determine whether these firms differ significantly from firms selected at random. It is concerned with those variables that are indicators ofthe firm’s risk‐return trade off character. As in previous studies of this nature, Multiple Discriminant Analysis was used. The results were somewhat surprising in that institutions did not seem to be drawn to what are perceived to be growth firms. As was expected, however, institutional favorites were larger in size than firms selected at random.