Price limit performance: New evidence from a quasi-natural experiment in China's ChiNext market

This study examines the impact of daily price limits on market performance and trading activity by using a quasi-natural experiment in China. It focuses on the case of the ChiNext market, where the daily price limits of stocks increased from 10% to 20% in 2020. The results show that, initially, the stock prices and occurrences of 10% price limit hits increase, but then decline after the new price limits have been implemented. The level of trading liquidity and volatility increases significantly, with a greater impact on the short term than the long term. These price limit performances are more pronounced for stocks with additional retail interest. The analysis of detailed trading data reveals that institutional investors initially purchase ChiNext stocks in large quantities, followed by retail investors who purchase smaller quantities. In the long run, institutional investors tend to increase their holdings, while retail investors tend to sell their holdings. Additionally, there is a temporary increase in investor attention, price synchronicity, and stock risks, followed by a decline. The findings suggest that wider price limits increase trading volumes and enhance long-term market efficiency, but encourage immediate price manipulation, causing short-term overreactions and long-term reversals. This study provides valuable insights for building an effective price limit system.     

Why are Stock Splits Declining?

The percentage of firms undertaking stock splits has fallen from a peak of 23% in 1982 to less than 1% in 2009. Controlling for time trends and other economic determinants, the declining incidence of stock splits is significantly associated with a drop in household investors’ equity holdings and with a rise in household income. We also report a decline in the size of split factors that is associated with an increase in institutional ownership of equity and with an increase in household income. Collectively, the evidence is consistent with firms responding rationally to changes in investor characteristics.     

Stock price synchronicity,crash risk,and institutional investors

Both stock price synchronicity and crash risk are negatively related to the firm's ownership by dedicated institutional investors, which have strong incentive to monitor due to their large stake holdings and long investment horizons. In contrast, the relations become positive for transient institutional investors as they tend to trade rather than monitor. These findings suggest that institutional monitoring limits managers' extraction of the firm's cash flows, which reduces the firm-specific risk absorbed by managers, thereby leading to a lower R². Moreover, institutional monitoring mitigates managerial bad-news hoarding, which results in a stock price crash when the accumulated bad news is finally released.     

THE EFFECTS OF STOCK SPLITS ON THE OWNERSHIP MIX OF A FIRM

This paper examines the relationship between stock splits and the ownership mix of firms. Previous studies suggest that firms issue stock splits to lower their stock price into an optimal range so small investors can more easily afford to buy round lots. The results of this paper show a positive relationship between stock splits and institutional ownership but no effect on the firm's number of shareholders. Thus, the percentage of shares owned by individual investors decreases after a stock split. The inverse relationship between institutional ownership and a firm's total assets suggests that small firms use stock splits to attract attention from Wall Street.     

Expected Mispricing: The Joint Influence of Accounting Transparency and Investor Base

We examine how accounting transparency and investor base jointly affect financial analysts' expectations of mispricing (i.e., expectations of stock price deviations from fundamental value). Within a range of transparency, these two factors interactively amplify analysts' expectations of mispricing—analysts expect a larger positive deviation when a firm's disclosures more transparently reveal income‐increasing earnings management and the firm's most important investors are described as transient institutional investors with a shorter‐term horizon (low concentration in holdings, high portfolio turnover, and frequent momentum trading) rather than dedicated institutional investors with a longer‐term horizon (high concentration in holdings, low portfolio turnover, and little momentum trading). Results are consistent with analysts anticipating that transient institutional investors are more likely than dedicated institutional investors to adjust their trading strategies for near‐term factors affecting stock mispricings. Our theory and findings extend the accounting disclosure literature by identifying a boundary condition to the common supposition that disclosure transparency necessarily mitigates expected mispricing, and by providing evidence that analysts' pricing judgments are influenced by their anticipation of different investors' reactions to firm disclosures.     

Institutional investors' holdings surrounding equity rights offerings

We examine shareholding surrounding Swedish rights offerings using detailed information on the ownership in firms. We analyze shareholding levels and their changes for domestic and foreign institutional investors. As institutional holdings change, domestic institutions increase their holdings more than foreign institutions. Our examination of low and high buying activities by institutional investors surrounding rights offerings shows no stock picking ability, thus not supporting the “smart-money hypothesis” (Gibson et al., 2004). We also find that investor domicile influences firm value following the offering. Overall, foreign investors exhibit a strong and opposite directional reaction to adverse selection costs than domestic investors.     

Voting with their feet: institutional ownership changes around forced CEO turnover

We investigate whether institutional investors “vote with their feet” when dissatisfied with a firm's management by examining changes in equity ownership around forced CEO turnover. We find that aggregate institutional ownership and the number of institutional investors decline in the year prior to forced CEO turnover. However, selling by institutions is far from universal. Overall, there is an increase in shareholdings of individual investors and a decrease in holdings of institutional investors who are more concerned with holding prudent securities, are better informed, or are engaged in momentum trading. Measures of institutional ownership changes are negatively related to the likelihoods of forced CEO turnover and that an executive from outside the firm is appointed CEO.     

Did institutions herd during the internet bubble?

We examine the trading behavior of institutional investors during the internet bubble and crash of 1998–2001, and its impact on stock prices. Similar to some recent findings concerning the trading behavior of hedge funds and NASDAQ 100 stocks, we find that during the bubble all types of institutions herded with great intensity into internet stocks for a comprehensive sample of institutional investors and internet stocks. In addition to this, we present three entirely new results. First, institutional herding was much greater than what can be explained by momentum trading. Second, institutions as a group continued to increase their holdings of internet stocks for two quarters past the market peak during the first quarter of 2000, and three quarters past the peak for individual stock prices, suggesting that institutions were unable to time the price peaks. Finally and most importantly, we find positive abnormal returns contemporaneous with institutional herding and negative abnormal returns (reversals) at the point that herding ceased. This finding suggests that institutions’ trading created temporary price pressures, and may have contributed to the bubble.     

Trading activity around chapter 11 filing

This paper uses institutional ownership data and order flow information to document and explain equity trading patterns prior to chapter 11 bankruptcy filing.We provide a model that predicts trading activity prior to filing which results from a difference of opinion amongst different types of investors about whether the firm should be liquidated. We then test trading data to show that trading activity is elevated around chapter 11 filing as the model predicts. We show how institutional holdings change around filing and that chapter 7 firms appear relatively more attractive to institutional investors than emerging firms around filing.     

The diffusion of corporate governance to emerging markets: Evaluating two dimensions of investor heterogeneity

This study investigates whether foreign institutional investors can enhance shareholder value in emerging markets. We pay special attention to two dimensions of investor heterogeneity: whether investors declare themselves to be activists, and whether activists come from countries with strong traditions of investor activism (identified by the incidence of hostile takeovers in their respective home countries). First, using an event study approach with regard to announcements of block purchases by foreign institutional investors in Korea, we find that stock prices increase only when foreign institutional investors declare themselves to be activists (increasing on average by 3% over a 20-day window). Second, we find that positive stock price reactions are more pronounced when the activist investors come from source countries with strong traditions of investor activism (increasing on average by 7% over a 20-day window). Third, we find that target firms are more likely to reduce cash holdings, raise leverage ratios, and peg dividend payouts, stock repurchases, and CEO turnover more closely to changes in earnings, but only if foreign activists come from countries with strong traditions of activism. We address possible selection bias by propensity score matching.     

Institutional Investors’ Reaction to SEC Concerns about IFRS and US GAAP Reporting

For the period of 2006 to 2008, we collect Comment Letters issued by the SEC that question the application of US GAAP by US firms or the application of IFRS by European firms registered with the SEC. We investigate whether institutional investors react to the letters by changing their holdings and whether their responses vary for US registrants and European registrants. We do this via a treatment‐effects model in which we test the hypothesis that institutional investors rebalance their portfolio holdings because they view Comment Letters as informative public signals. We find that institutional investors reduce their equity holdings when firms receive SEC Comment Letters, and their negative reactions are most marked for low turnover institutional investors, who we use to represent those informed investors most prepared to incur costs to closely monitor firms. Next, while noting that the number of Letters questioning application of IFRS are smaller in number relative to those questioning application of US GAAP, we investigate whether there are different reactions to Comment Letters questioning different standards. We show that there is a higher probability of the SEC questioning the application of IFRS as compared to US GAAP. After controlling for firm‐specific conditions that impact the issuance of a Comment Letter, we show that this higher probability has economic significance because institutional investors’ react more negatively to Comment Letters that question the application of IFRS as compared to US GAAP. A content analysis confirms the economic importance of the Comment Letters. We find that in almost half of all IFRS cases the Comment Letters request amendments to financial statements.     

险资持股对上市公司股价波动的影响研究 ——基于机构投资者异质性视角

保险机构已经成为资本市场重要的机构投资者,其在整个资本市场中的作用日益受到关注.基于机构投资者异质性的视角,对保险机构和证券投资基金、社保基金以及Q FII等其他机构投资者的持股特征进行对比分析,总结梳理保险机构投资者持股的特征.并运用面板数据模型,从长期持股和持股比例变动两个方面对比分析保险机构持股与证券投资基金持股对股价波动的影响.结果表明:在样本期间内,相对于证券投资基金,保险机构长期持股起到了稳定股市的作用,但保险机构持股比例变动会加剧股市的波动.     

Social trust and foreign ownership: Evidence from qualified foreign institutional investors in China

We investigate the effects of social trust on foreign institutional investors’ equity holdings in listed Chinese firms from 2005 to 2011. We find that social trust embedded in the regional environment is an important factor for the investment decisions of foreign institutional investors. We also find that the proportion and likelihood of foreign ownership increases with the level of social trust. The results support the notion that social trust and trust-related information help mitigate informational barriers in international equity investments. Our results are robust to alternative measures of social trust and a range of model specifications, including instrumental variable estimation. We document that the effects of social trust on foreign ownership diminishes in the presence of organizational learning, better formal institutional development, conservative financial reporting, and asset transparency. We also show that foreign institutional investors from countries with a common law origin are more likely to incorporate trust-related information in their investment decisions.     

The Effect of Option Listing on Bid-Ask Spreads,Price Volatility,and Trading Activity of the Underlying OTC Stocks

This paper examines the changes in spreads, price volatility, and trading activity surrounding option listing for a sample of 144 OTC stocks. For this sample, both price volatility and volume increase, but the evidence on spreads is mixed. The increase in price volatility is attributed primarily to an increase in residual return variances. Furthermore, price volatility increases even after controlling for volume, insider trading, and spreads. Although these variables do not fully explain the causes for the increase in price volatility after option listing, the results suggest that liquidity trading or volume has a stronger effect on price volatility than insider trading. This study also finds that both the number of trades and institutional holdings show substantial increases, which are supportive of the notion that listing of options on OTC stocks attracts more attention.     

Foreign exposure through domestic equities

We show that US investors obtain substantial foreign exposure through their holdings of domestic equities. Domestic multinationals, in particular, provide significant foreign exposure. We also find that, although the average US investor is less tilted toward domestic multinationals, institutional investors do overweight domestic firms that are more internationally oriented. ‘Indirect’ foreign holdings through domestic multinationals are shown to be substantial; combining them with reported data on international positions almost doubles US investors’ total ‘foreign’ holdings. Our findings indicate that the home bias is not as severe as assessments based on reported international investment statistics suggest.     

Making honest men of them: Institutional investors,financial reporting,and the appointment of female directors to all-male boards

In this paper, we theorize that dedicated institutional investors are more likely than transient institutional investors to appoint female directors to investee firms with all-male boards, particularly those with high opacity. We conjecture that dedicated investors appoint female directors as a governance mechanism to improve the financial reporting quality of these investee firms. Specifically, we find that through the appointment of female directors, dedicated institutional investors trigger the release of stockpiled negative accounting information, thereby increasing the likelihood of a stock price crash risk. We also show that dedicated investors, through the appointment of female directors, improve investee firms' corporate disclosure environment by decreasing earnings management. Finally, we find that through continued service on investee firms' boards, female directors reduce the future likelihood of a stock price crash.     

In search of retail investors: The effect of retail investor attention on odd lot trades

We study the effect of retail investor attention on odd lot trading. We observe that increases in abnormal Google search volume predict odd-lot trading. Importantly, this relationship is share price-sensitive: For stocks priced below $11, an increase in abnormal search volume leads to less odd lot trading. For stocks priced above $46, on the other hand, an increase in abnormal search volume leads to more odd lot trading. For a stock priced at $78 – the mean share price in our sample – a one standard deviation increase of abnormal search volume increases the average share of odd lot trading by 10 basis points. This effect is even stronger for more expensive stocks. Our results are consistent with attention-induced trading when investors face wealth constraints and are robust to alternative channels including news and institutional investor attention.     

Heterogeneity in asset allocation decisions: Empirical evidence from Switzerland

We analyze the heterogeneity in asset allocation decisions of different investor groups in response to changes in the macroeconomic environment. Using a new data set that includes the monthly portfolio holdings of private, commercial, and institutional investors deposited with Swiss banks, we estimate the relationship between equity and bond holdings and common business cycle indicators. Regression analysis indicates that private investors do not systematically move from stocks into bonds by selling stocks to institutional investors and purchasing bonds from them in adverse macroeconomic states. A VAR-error correction framework including cointegration and error correction restrictions suggests that the investment behavior of commercial investors leads and private investors follow in their investment decisions only slowly over time. The asset allocation decisions of institutional investors are not affected by the actions of private and commercial investors. Our results refute a principle of “institutional irrelevance”.     

Climate risk: The price of drought

We document a significant positive relation between drought risk and the cost of equity capital. Our estimation shows that the cost of equity capital is 92 basis points higher for firms affected by severe drought conditions. We provide evidence that when firms are affected by droughts, firms with higher local institutional holdings exhibit a higher cost of equity capital. This result supports the well-known local bias of institutional investors, and suggests that diversification cannot fully eliminate the loss in wealth caused by droughts. Consistent with theoretical predictions, we find that drought duration and drought intensity further increase a firm's risk premium. However, for firms with diversified cash flows/investments, geographically dispersed business operations, and high cash holdings, the impact of drought on the expected return is significantly lessened. Overall, our findings show that investors require a higher rate of returns on firms affected by droughts and offer implications on how firms can mitigate the impact of droughts on their cost of capital.     

机构投资者能抑制上市公司商誉减值风险吗？——基于中国A股市场的经验证据

巨额商誉减值风险是资本市场系统性风险的重要诱因之一。本文以2011—2018年中国A股上市公司为样本,检验机构投资者持股对上市公司商誉减值风险的影响。研究发现,机构投资者持股能够显著抑制上市公司计提商誉减值的风险。分类来看,相比非独立机构投资者,以证券投资基金、社保基金及QFII为代表的独立性机构投资者持股对商誉减值风险的抑制作用更显著。机制检验发现,机构投资者通过提供并购前咨询服务和改善公司并购后绩效来抑制商誉减值风险。本文研究揭示了机构投资者发挥了有效的监督治理功能,对防范商誉减值风险具有一定的启示意义。