Local institutional investors,information asymmetries,and equity returns

We examine the informational role of geographically proximate institutions in stock markets. We find that both the level of and change in local institutional ownership predict future stock returns, particularly for firms with high information asymmetry; in contrast, such predictive abilities are relatively weak for nonlocal institutional ownership. The local advantage is especially evident for local investment advisors, high local ownership institutions, and high local turnover institutions. We also find that the stocks that local institutional investors hold (trade) earn higher excess returns around future earnings announcements than those that nonlocal institutional investors hold (trade).     

Does Investment Horizon Matter? Disentangling the Effect of Institutional Herding on Stock Prices

This study finds that, over short horizons, herding by short‐term institutions promotes price discovery. In contrast, herding by long‐term institutions drives stock prices away from fundamentals over the same periods. Furthermore, while the positive predictability of short‐term institutional herding for stock prices is more pronounced for small stocks and stocks with high growth opportunities, the negative association between long‐term institutional herding and stock prices is stronger for stocks whose valuations are highly uncertain and subjective. Finally, we show that the destabilizing effect of institutional herding persistence documented in the recent literature is entirely driven by persistent herding by long‐term institutions.     

Institutional trading and stock returns

In this study, we explore the dynamics of the relation between institutional trading and stock returns. We find that stock returns Granger-cause institutional trading (especially purchases) on a quarterly basis. The robust and significant causality from equity returns to institutional trading can be largely explained by the time-series variation of market returns, that is, institutions buy more popular stocks after market rises. Stock returns appear to be negatively related to lagged institutional trading. A further analysis of the behavior of trading and the returns of the traded stocks reveals evidence that stocks with heavy institutional buying (selling) experience positive (negative) excess returns over the previous 12 months.     

Societal trust and corporate tax avoidance

Using an international sample of firms from 25 countries and a country-level index for societal trust, we document that societal trust is negatively associated with tax avoidance, even after controlling for other institutional determinants, such as home country legal institutions and tax system characteristics. We explore the effects of two country-level institutional characteristics—strength of legal institutions and capital market pressure—on the relation between societal trust and tax avoidance. We find that the relation between trust and tax avoidance is less pronounced when the legal institutions in a country are stronger and is more pronounced when the capital market pressure is stronger. Finally, we examine the relation between societal trust and tax evasion, an extreme and illegal form of tax avoidance. We show that societal trust is negatively related to tax evasion and the negative relation is less pronounced when legal institutions are stronger.     

Trading on inside information: Evidence from the share-structure reform in China

We examine stock trading activities in days before Chinese listed firms made public announcement to start share-structure reform. There is significant evidence that, relative to a benchmark period, institutional investors bought more event firms’ shares in the last two trading days prior to announcement. Randomization tests show significant differences in institutional trading activities between event firms and matched control firms, which suggests that some institutions had inside information. Moreover, large trades account for a significant proportion of daily stock price changes in the last 2 days. The evidence is consistent with the prediction by Holden and Subrahmanyam (1992) that, when multiple informed investors acquire the same piece of information, they will trade aggressively. We also find that over the reform period, the median share value change of event firms is 6% higher than that of control firms. Our findings have important implications for enforcement of insider trading regulations in China.     

Regulatory underpricing: Determinants of Chinese extreme IPO returns

The Chinese stock market with its unique institutions is rather different from western stock markets. The average underpricing of Chinese IPOs is 247%, the highest of any major world market. We model this extreme underpricing with a supply-demand analytical framework that captures critical institutional features of China's primary market, and then empirically test this model using a sample of 1377 IPOs listed on the Shanghai and Shenzhen Stock Exchanges between 1992 and 2004. We find that Chinese IPO underpricing is principally caused by government intervention with IPO pricing regulations and the control of IPO share supplies. Besides the regulatory underpricing, this paper also documents some specific investment risks of IPOs in China's stock market.     

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.     

Institutional investors: Arbitrageurs or rational trend chasers

This paper studies the relationship between institutional investor holdings and stock misvaluation in the U.S. between 1980 and 2010. I find that institutional investors overweigh overvalued and underweigh undervalued stocks in their portfolio, taking the market portfolio as a benchmark. Cross-sectionally, institutional investors hold more overvalued stocks than undervalued stocks. The time-series studies also show that institutional ownership of overvalued portfolios increases as the portfolios' degree of overvaluation. As an investment strategy, institutional investors' ride of stock misvaluation is neither driven by the fund flows from individual investors into institutions, nor industry-specific. Consistent with the agency problem explanation, investment companies and independent investment advisors have a higher tendency to ride stock misvaluation than other institutions. There is weak evidence that institutional investors make a profit by riding stock misvaluation. My findings challenge the models that view individual investors as noise traders and disregard the role of institutional investors in stock market misvaluation.     

Trust in financial services: the influence of demographics and dispositional characteristics

So far, very little attention has been paid to examining consumer perceptions of trust from an interdisciplinary perspective. The purpose of this study is to examine how consumer trusting belief and disposition to trust within the financial services sector vary on the basis of individual demographic differences in trust. The research provides new insights into how consumers with higher dispositional trust have higher institutional trust and higher trusting belief and how consumers’ trusting belief significantly differs according to their demographic background in terms of age, marital status, ethnicity and gross annual income. The findings offer useful insights for the managers in financial institutions to carefully consider the impact of the influence of these individual differences on consumer behaviour in order to serve the needs of consumers in their target market and be able to design financial products and develop trust building strategies to attract and retain them. They also call for the action of the regulators and the financial institutions to play their part in building strong institutional systems that contribute to engendering higher levels of consumer trust.     

The Dynamics of Institutional and Individual Trading

We study the daily and intradaily cross‐sectional relation between stock returns and the trading of institutional and individual investors in Nasdaq 100 securities. Based on the previous day's stock return, the top performing decile of securities is 23.9% more likely to be bought in net by institutions (and sold by individuals) than those in the bottom performance decile. Strong contemporaneous daily patterns can largely be explained by net institutional (individual) trading positively (negatively) following past intradaily excess stock returns (or the news associated therein). In comparison, evidence of return predictability and price pressure are economically small.     

Institutional Investor Ownership and Corporate Pension Transparency

We examine the association between institutional ownership and defined benefit (DB) pension decisions. We find that institutional ownership is negatively associated with pension underfunding, opportunistic increases in the expected rate of return assumption in the presence of underfunding, and significant ownership of the firm's own stock in the DB plan portfolio. Furthermore, these relations are stronger when institutional ownership is concentrated, when institutions are nontransient investors, or when institutions are relatively large. These results suggest that institutional investors are monitoring firm pension decisions, particularly those institutions with stronger monitoring incentives or resources.     

Trust, contracting and the prospectus process

This study explores the role of trust and the ways in which trust is created within the prospectus process. It is argued that trust is a necessary condition for economic exchange and that trust must exist prior to contracting. The theoretical analysis provided deconstructs the contract as the original event and points to the limitations of traditional accounting analyses in understanding economic exchange. In addition, examples from the prospectus process are used to illustrate how some of the capital market institutions and institutional practices that we observe create and recreate the trust necessary for exchange.     

Institutional investor stability and crash risk: Monitoring versus short-termism?

This study tests two opposing views of institutional investors—monitoring versus short-termism. We present evidence that institutional investor stability is negatively associated with 1-year-ahead stock price crash risk, consistent with the monitoring theory of institutional investors but not the short-termism theory. Our findings are shown to be robust to alternative empirical specifications, estimation methods and endogeneity concerns. In addition, we find that institutional ownership by public pension funds (bank trusts, investment companies, and independent investment advisors) is significantly negatively (positively) associated with future crash risk, consistent with findings that pension funds more actively monitor management than other types of institutions.     

Price informativeness and institutional ownership: evidence from Japan

Using extensive intraday transaction and institutional ownership data of Japan, this study investigates the question of whether institutional ownership increases the extent to which equity prices reflect information about the firms’ fundamentals (the degree of price informativeness) and the roles played by various types of institutional investors. The results indicate that the presence of institutional investors, especially foreign institutions, increase the amount of information aggregated in the stock prices. Such relation is robust to various liquidity measures, possible presence of endogeneity in the ownership structure, and alternative measures of price informativeness.     

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.     

Government intervention and institutional trading strategy: Evidence from a transition country

This study investigates the effectiveness of government intervention in rescuing bearish markets in a transition economy. Focusing on a pre- and a post-intervention period, the findings reveal that government intervention successfully rescued bearish markets in China and led to a fundamental change in institutional trading strategy after the intervention. We observe that following an intervention, institutions are more sensitive to long-term stock market regulations, whereas individual investors are more concerned about the rules related to their short-term interests. Evidence suggests that a credible signal from the government can be helpful in creating a positive outcome in the market (Bhanot & Kadapakkam, 2006). The findings are important to the current debate regarding the role of government intervention in markets in other transitional economies, as well as in developed countries.     

Does societal trust make managers more trustworthy?

This study examines the effects of shareholders' trust on managers' bad news hoarding. Using a large sample of listed firms from 33 countries, we find that firms domiciled in countries with higher societal trust have higher stock price crash risk, which indicates that managers may exploit shareholders' trust to conceal bad news and that a low-trust society can be beneficial in restraining management misconduct due to the monitoring undertaken by low-trust outsiders. We also find that the positive association between societal trust and crash risk is less pronounced (1) when low-trust foreign shareholders have greater control over a country's firms, in line with the view that low-trust shareholders' concerns about being expropriated by managers and the consequent strong efforts at monitoring; (2) when long-term investors have greater control over a country's firms, suggesting that long-term investors playing a complementary role in monitoring corporate governance; and (3) when a country has strong formal institutions, such as investor protection and financial accounting systems, suggesting that robust formal institutions are substitute for social norms.     

Does foreign institutional ownership increase return volatility? Evidence from China

This paper investigates the impact of foreign institutional ownership on firm-level stock return volatility in China, based on our study of a sample of 1458 firms between 1998 and 2008. The empirical results show that share ownership by foreign institutions (both financial and non-financial) increases firm-level stock return volatility, even after controlling for a complete ownership structure, firm size, turnover, and leverage, and correcting for potential endogeneity problems. However, the results also show that foreign individual shareholdings reduce volatility. Furthermore, we document a positive relationship between domestic shareholdings (individual, institutional, and governmental) and firm-level stock return volatility. Empirical results with interaction terms show that foreign institutional ownership increases firm-level return volatility by strengthening the positive impact of liquidity on volatility. The volatility reduction effect of foreign individual ownership is attenuated by government ownership suggests a poor governance environment as a result of the involvement of the Chinese government.     

Accounting regulations,enforcement, and stock price crash risk: Global evidence in the banking industry

This study uses the banking industry as a unique testing setting to examine the impact of accounting and enforcement regulations on stock price crash risk. We find that stocks are less likely to crash in countries with stricter accounting regulations and enforcement standards. More importantly, we provide evidence that the impact of accounting regulations is more significant in countries with stricter enforcement standards, suggesting that enforcement mechanisms and accounting regulations are complementary. We find that the main channels for accounting regulations and enforcement standards to affect stock price crash risk are regulations that strengthen information disclosure and improve the effects of direct supervision and external auditors. Our findings are robust after we include more control variables, employ regional regulatory developments as instrumental variables, conduct change regressions, use alternative measures of enforcement, and estimate in various subsamples. Our study has policy implications for how to design accounting regulations and enforcement mechanisms in a more effective manner.     

The Determinants of REIT Institutional Ownership: Tests of the CAPM

This study examines the determinants of institutional investment demand for REIT common stock. We estimate the demand function for financial institutions using the mean return and CAPM risk measures (beta and standard error) for REIT stocks. The objective is to determine whether institutional investment decisions are influenced by CAPM model attributes. In addition, we examine the predicatability of REIT institutional ownership based on the factors in our model. We employ conventional OLS forecasting techniques, as well as two neural network models in order to deal with possible nonlinearities in the relationships.