Heterogeneous Beliefs, Institutional Investors and Stock Returns – Evidence from China

Abstract

Using the turnover decomposition model, I extract unexpected trading volume from the institutional investors’ trading activity to measure the institutional investors’ heterogeneous beliefs and explore the explanatory power of that on stock returns. Portfolios built according to the magnitude of institutional investors’ heterogeneous beliefs are significantly profitable. The expected returns of portfolios with higher heterogeneous beliefs are significantly higher than other portfolios, particularly for small companies, and the influence of institutional investors’ heterogeneous beliefs on stock returns during the current month is significantly positive, but it is significantly negative for the next month. When considering beta, bm, size and short-sales constraints, the conclusion is still valid.