Institutional ownership, free float, and systematic risk

This study investigates how institutional ownership (IO) and free float (FF) jointly affect firms’ systematic risks. It contends that larger institutional stakes increase the dollar imbalance subject to common flows, whereas a greater tradable float broadens the set of funds that can trade synchronously. Both channels should increase the stock market beta. Using a cross-section of 12,655 non-financial firms from 93 countries, unconditional, downside (β−), and upside (β+) capital asset pricing model betas over two-, three-, and five-year windows are analysed. The results confirm that IO and FF are positively and significantly associated with unconditional and downside betas. These relationships remain robust after controlling for firm size, valuation, profitability, leverage, liquidity, and industry fixed effects, indicating that the ownership and tradability channels explain systematic risk beyond standard fundamentals. The impact of IO is pronounced for upside beta. Two-stage least squares regressions corroborate the baseline results while addressing endogeneity concerns. Additional tests show that the IO effect is concentrated in advanced economies, while the FF effect remains robust across geography, development status, and firm size. This study evinces the trading flow hypothesis that ownership concentration and tradability are the additive drivers of systematic risk.