Stockholder Analysis for Sample Companies: Who are the Marginal Investors?

To analyze the stockholders in each firm, we searched for a stockholder composite as of the end of 1997. As shown in the above graph, institutional holdings account for about 40% to 60% in each company. In IBM, the stockholders are well-diversified, as there are no large stockholders with more than 5% of the shares in IBM. Compaq and Unisys have a few large institutional holders, but are sufficiently diversified, given their shares are not disproportionately large compared to other funds. Considering the scale of these firms, as well as the average 50.3% and 47.3% institutional holding in the hardware and software industries, respectively, these four companies are sufficiently diversified.

On the other hand, with regard to insider holdings, all four firms (except for Hewlett Packard and Oracle) have far lower insider holdings than other companies in their peer groups. In the case of Oracle , the CEO is a co-founder of the company, while at HP, some of its directors are related to the family. So the insider holdings of each firm are nearly the same when compared to the industry average. The trading volume implies that insiders of these firms may not have an impact on their respective stock prices.

In summary, marginal investors are clearly institutional. Risk and return models assumes that the marginal investor is well diversified and that only non-diversifiable risk matters. Here, the marginal investor is the institutional investor, so this assumption should work well.