Heterogeneous institutional preferences and informativeness: Evidence from China

Abstract

Using complete semi-annual stock holdings of seven different types of institutional investors including public mutual funds, insurance companies, social security funds, qualified foreign institutional investors (QFIIs), asset management portfolio of securities companies, proprietary trading portfolio of securities companies, and trust funds, we investigate those heterogeneous institutional investors' preferences and informativeness in the China's A-shares market from 2005 to 2017. We find that although those institutional investors in aggregate prefer to hold stocks with a lower market risk, a larger size, a higher share price, a lower turnover ratio, a higher return on equity ratio, a higher leverage ratio, a higher floating percentage, better past year performance, and lower controlling shareholder's ownership, insurance companies tend to hold past loser stocks. In addition, our results indicate that only qualified foreign institutional investors are informed among those seven types of institutional investors. While our findings show that holding changes of public mutual funds and social security funds exhibit short-term return predictability, there is a price reversal effect for their holdings after one year. Furthermore, qualified foreign institutional investors exhibit a better trading skill while insurance companies demonstrate a worse trading skill. Finally, our results show that institutional investors are generally market stabilizers in the China's A-shares market.