Heterogeneous Institutional Preferences and Informativeness: Evidence From China

Abstract

Using complete semi-annual stock holdings of seven different types of institutional investors: mutual funds, insurance companies, qualified foreign institutional investors (QFIIs), social security funds, proprietary trading portfolio of securities companies, asset management 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 growth, larger size, higher share price, lower turnover, lower volatility, higher leverage, and past winner stocks, insurance companies and trust funds like to hold value and past loser stocks, suggesting that insurance companies and trust funds are more conservative than other institutions. In addition, we find that stock holdings of QFIIs and holding changes of mutual funds and social security funds account for the explanatory power of total institutional ownership on stock returns in the following six months, suggesting that mutual funds, QFIIs, and social security funds are more informed than other institutions. Furthermore, our trading portfolio analysis shows that social security funds demonstrate a superior stock picking ability while insurance companies’ trading portfolio exhibits a loss in the following six months. Collectively, because social security funds have a higher than average churn rate and insurance companies exhibit a lower than average churn rate during our sample period, our evidence suggests that more informed institutions also trade more often in the China’s A-shares market.