Behavior Of Institutional Investors Research Articles

The Complex Mechanism of Social Networks' Influence on the Behavior of Institutional Investors

It examines the mechanism of influence on institutional investors by social networks, specifically looking at the dual roles of information dissemination and social capital accumulation. This paper collects financial data, transaction records, and social network data concerning institutional investors. Descriptive statistical analysis and multivariate regression analysis were adopted to test the critical impact of social networks on investment decisions. The results show that information sources and social capital have a significant positive impact on investment amounts. Institutional investors who can obtain direct information sources have significantly increased their investment amounts, and the accumulation of social capital also has a significant promoting effect on investment amounts. Descriptive statistical analysis reveals the differences in the social capital and information sources of different investors on their investment behaviors. Regression analysis further quantifies these effects. It can be seen that information sources and social capital were 200000 and 10000 respectively, while the P value was far less than 0.01, highly significant in general. This paper not only verifies the key role of social network in institutional investors' behavior but provides a very important reference to sponsoring actual investment decisions. It shows how social networks have a significant role in information dispersion and accumulation of social capital on the behavior of guiding institutional investors. This promotes more extensive use of the scope of social network theory applications in the context of finance literature and provides newer perspectives and strategies for institutional investors.

Asset prices when large investors interact strategically

This paper examines equilibrium asset prices and leverage in an exchange economy populated with both retail and institutional investors. Institutional investors influence the price of the stocks they trade and are aware of the price impact of the opponent and, thus, interact strategically. Because of the price impact, institutional investors decrease their demand for stocks and lend money to the retail sector, thereby increasing leverage in the economy. The risk-free rate (equity premium) tends to be lower (higher) as compared to an economy populated by retail investors only. Retail investors' compensation for liquidity provision depends on the behavior of institutional investors and the state of the economy.

Gambling preferences and fund company ownership: Evidence from China

This paper empirically tests the preference of China's public mutual funds for lottery-type equities, analyzing data from equity funds in the country's public mutual fund market from 2005 to 2022. The study finds that this gambling preference positively correlates with short-term fund performance, but negatively impacts long-term outcomes. Further investigation shows that the funds' propensity for gambling increases stock market volatility. However, fund company ownership can mitigate this risk amplification by implementing a risk-sharing structure. Additionally, a significant positive correlation exists between the mutual fund industry's gambling inclination and fund managers' optimism about future market movements. Finally, this article employs text analysis to explore the influence of gambling preferences from a non-quantitative information perspective, which helps control the investing behavior of institutional investors and enhances the real economy's access to the capital market.

Exact Solution to a Generalised Lillo–Mike–Farmer Model with Heterogeneous Order-Splitting Strategies

The Lillo–Mike–Farmer (LMF) model is an established econophysics model describing the order-splitting behaviour of institutional investors in financial markets. In the original article (Lillo et al. in Phys Rev E 71:066122, 2005), LMF assumed the homogeneity of the traders’ order-splitting strategy and derived a power-law asymptotic solution to the order-sign autocorrelation function (ACF) based on several heuristic reasonings. This report proposes a generalised LMF model by incorporating the heterogeneity of traders’ order-splitting behaviour that is exactly solved without heuristics. We find that the power-law exponent in the order-sign ACF is robust for arbitrary heterogeneous order-submission probability distributions. On the other hand, the prefactor in the ACF is very sensitive to heterogeneity in trading strategies and is shown to be systematically underestimated in the original homogeneous LMF model. Our work highlights that predicting the ACF prefactor is more challenging than the ACF exponent because many microscopic details (complex ingredients in actual data analyses) start to matter.

The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense Out of the Global Transplant of a Legal Misfit

Abstract In 2010, the United Kingdom issued the world’s first stewardship code. Since then, stewardship codes have been issued in many of the world’s leading economies and now exist in twenty jurisdictions on six continents, with more jurisdictions considering adopting them. In the United Kingdom, stewardship codes were promised to transform rationally passive institutional investors into actively engaged shareholders to prevent another global financial crisis (GFC). More recently, the new 2020 U.K. Stewardship Code (U.K. Code) has been promoted as a mechanism to save the planet by incentivizing institutional investors to pressure listed companies to focus on environmental, social, and corporate governance (ESG). There is a vigorous debate and developed literature on whether the U.K. Code will achieve these goals. However, what has been lost in this debate is that outside of the United Kingdom/United States it may not matter nearly as much if stewardship succeeds in changing the behavior of institutional investors. This is because, with the notable exception of the United Kingdom/United States, institutional investors are collectively minority shareholders in most listed companies in almost every jurisdiction in the world. Moreover, in almost every jurisdiction, with the notable exception of the United Kingdom/United States, most listed companies already have a rationally active—non-institutional—controlling shareholder as their “steward.” Why then have jurisdictions around the world adopted U.K.-style stewardship codes which are designed based on the assumption that institutional investors collectively control most listed companies? This Article answers this question by undertaking the first in-depth global comparative analysis of the curious transplant of U.K.-style stewardship codes into jurisdictions dominated by controlling shareholders and examines the role that stewardship plays in these jurisdictions. It does this by drawing on a unique collection of recent in-depth case studies on stewardship in twenty-two jurisdictions by leading corporate law experts, hand-collected data analyzing the content of every stewardship code that has ever been issued, and fresh hand-compiled data on shareholder ownership structures in listed companies around the world. It reveals that stewardship has been coopted by governments and institutional investors to serve their own diverse purposes—a troubling trend which will likely be exacerbated post-Covid-19, when an authentic focus on an inclusive society and the environment will be more critical than ever.

Heterogeneity of foreign investors and Knightian uncertainty: Evidence from the Chinese capital market

Foreign investors are playing an increasingly important role in China's capital market, and the impact of northbound funds on Knightian uncertainty has attracted much academic attention. Based on the characteristics of northbound funds' trading behavior and investors' shareholding stability, this study divides them into long-term investors and short-term opportunists. It also examines the effect of long- and short-term foreign investors on individual stock Knightian uncertainty. The study finds that higher stability of northbound fund shareholding lowers the Knightian uncertainty of individual stocks, and long-term foreign institutional investors contribute to market stability. Furthermore, long-term investments in northbound funds can reduce Knightian uncertainty by improving the information environment, influencing the trading behavior of institutional investors, boosting investor confidence, and helping investors form consistent expectations. In conclusion, short-term foreign investors aggravate market volatility, whereas long-term foreign institutional investors help stabilize the market.

Institutional Investor Behavior: A Comprehensive Study at the Pakistan Stock Exchange

The primary aim of this research is to study the impact of the behavioral factors shaping the investment decisions of institutional investors operating within the Pakistan Stock Exchange. Additionally, the study investigates the relationship between these behavioral factors and investment decisions, considering the moderating impact of investment experience. Given the scarcity of studies on behavioral finance in the Pakistani context, this research anticipates making a substantial contribution to the advancement of this field within the country. Building on established behavioral theories and prior research, the study posits four categories of behavioral biases, Self-deception (encompassing Self-attribution and Overconfidence), Heuristics (comprising Representativeness, Loss-aversion, and Anchoring), Emotions (specifically, Regret aversion), and social biases (including Herding).
 The sampling approach employes stratified random sampling, wherein the fund managers at Pakistan stock exchange (PSX) are divided into four strata based on homogeneous characteristics, then data is collected using questionnaire from each stratum. Subsequently, the collected data is analyzed using SPSS, incorporating techniques such as Exploratory Factor Analysis, Regression, Correlation Analysis, and Moderation Analysis.
 The findings of the study suggest the presence of distinct behavioral factors that significantly influence the investment decisions of institutional investors at the Pakistan Stock Exchange. Notably, all biases exhibit a significant positive impact on investment decisions, except for the herding bias. The research findings also indicate that, contrary to expectations, there is no moderating effect of investment experience on the relationship between investment decisions and behavioral biases among institutional investors.

An ARDL Co-integration technique to examine the investment behaviour of institutional investors

An ARDL Co-integration technique to examine the investment behaviour of institutional investors

A systematic mapping and global perspective of herding behavior of institutional investors: A bibliometric analysis

A systematic mapping and global perspective of herding behavior of institutional investors: A bibliometric analysis

The relationship between the intrinsic value of the stock and the institutional investor behavior applied on the listed firms in Kuwait stock market

The relationship between the intrinsic value of the stock and the institutional investor behavior applied on the listed firms in Kuwait stock market

Interpreting institutional investment activity as a markov process: A stock recommender

Institutional investors like hedge funds are particularly resilient in times of volatility, primarily due to their access to a slew of complex trading strategies and extensive research capabilities; both of which are generally outside the reach of common investors. Fortunately, the U.S. Securities and Exchange Commission has mandated that large institutional investors publicly disclose the positions held by them at the end of a quarter, within the following 45 days. We then ask the question “Given our access to snapshots of positions held by large investors, can we extract alpha by approximating their aggregate behaviour?” In this paper, we introduce a stock recommendation model driven by the aggregate behaviour of institutional investors. We interpret stocks as the states of a Markov chain. The corresponding state transition matrix is defined based on the aggregate behaviour of investors. By designing the transition matrix to hold for aperiodicity and irreducibility, the steady state distribution of this chain is treated as a ranked list of stocks. We build a long only, equally weighted portfolio of stocks to trade using these recommendations. We observe that the returns on this portfolio beat existing models in the literature, and standard hedge fund indices both in terms of annualised returns and Sharpe ratio.

Air pollution and institutional investors' valuation bias during initial public offerings

We examine the effect of day-to-day and geographic variation in air pollution on the bidding behavior of institutional investors in Chinese IPO auctions. We find that institutional bidders who are exposed to more severe air pollution submit more pessimistic (lower) bids. We construct an instrumental variable based on the wind speed to further establish the causal relation between air pollution and institutional investors' valuation bias. Air pollution-induced bias is amplified under more depressing environmental conditions, in IPOs with greater information uncertainty, and among inexperienced bidders. Moreover, institutional bidders affected by air pollution obtain fewer share allocations and earn lower returns. Finally, air pollution-induced bias in aggregate can negatively affect the pricing efficiency of IPOs.

Are institutional investors colluding with manipulators?

AbstractThis paper examines the trading behavior of institutional investors in Taiwan before, during, and after a manipulation event and determines whether institutional investors benefit from their trading behavior during the period from the year 2000 to 2020. We find that stocks with a low turnover and small market capitalization are the main targets of price manipulators. In addition, the stock price of manipulated firms increases from the start date of the manipulation event, peaks at the end of the event, then falls after the event. Foreign institutions collude with manipulators to exaggerate stock prices for self‐benefit. In contrast, securities dealers counter the trading behavior of manipulators and act as market stabilizers, causing them to suffer losses. Moreover, foreign institutions earn higher returns on stocks of manipulated firms with a low turnover during and soon after manipulation; however, they earn a higher return on stocks of manipulated firms with a high turnover in the long run after manipulation.

The consequences of non‐trading institutional investors

AbstractWe document that institutional investors do not trade a single share, on average, in one of five stocks in their portfolio for an extended period. Investors with high inaction are likely to underperform in the future. Our results show a similar underperformance for stocks with a high non‐trading level of institutional investors. We investigate several behavioral biases as potential drivers of the non‐trades and find no evidence of distraction, overconfidence, and disposition effects. Institutional investors’ tendency to sell stocks with salient price movements and recency bias best explains their inactions. Overall, the non‐trading behavior of institutional investors serves as a unique predictor for their future performance and potential behavioral biases are driving this predictability.

Institutional investor information network, analyst forecasting and stock price crash risk

In this paper, we construct the information network of fund investors based on the theory of social relationship networks and examine its impact of fund information sharing with analysts on stock price crash risk. Our results show that private information sharing among institutional investors reduces crash risk. Further results show that fund information sharing can alleviate analyst optimism bias and improve analyst forecast accuracy, which further reduces stock price crash risk. Moreover, these identified effects are more pronounced in a bull market than a bear market. Our study contributes to the research on private information transmission in fund information networks, and provides a new perspective for recognizing the relationships among institutional investor behavior, analyst forecasting, and stock price crash risk.

Strategic interaction between institutional investors and supervision department: a theoretical analysis of low-price collusion in SBIC

We introduce evolutionary game method to analyze low-price collusion in inquiry market of Sci-Tech Innovation Board of China (SIBC) from the perspective of strategic interaction between large institutional investors (LIIs), small and medium-sized institutional investors (SMIIs), and supervision department (SD). The results show that supervision behaviors of SD, and quotation behaviors of institutional investors, are subject to supervision conditions. Under the condition that benefits of tough supervision are lower a lot than minimum benefits of light supervision (light supervision condition), SD will choose light supervision and institutional investors will turn to illegal quotation in response. Finally, a steady-state equilibrium with low-price collusion will form in SIBC’s inquiry market even with a large supervision penalty for illegal quotation. On the contrary, under the condition that benefits of tough supervision are higher a lot than maximum benefits of light supervision (tough supervision condition) and with a large penalty for illegal quotation, SD and institutional investors will choose tough supervision and legal quotation. Further numerical simulations under light supervision condition show that: (1) High-price culling rule will become a booster for low-price collusion and accelerate SMIIs’ evolutionary process to imitative quotation. (2) Blindly increasing penalties for illegal quotation or reducing the culling rate is not an appropriate approach to solve the problem of low-price collusion since it cannot shift supervision condition from light into tough and make SD supervise toughly. (3) Institutional investors’ choices of quotation strategies are more volatile and highly susceptible to supervision behaviors of SD when facing exogenous uncertainty. Therefore, the keys to solving the problem of low-price collusion are shifting supervision condition from light into tough through increasing incremental benefits of tough supervision, and providing institutional investors with a stable and predictable supervision policy. In conclusion, the creation of a fair inquiry market doesn’t only depend on restraint and punishment to institutional investors, but also requires the establishment of supervision mechanism those are compatible with market-based inquiry.

Do Institutional Group Holding Anomalies Drive Broad Market Trends?

This paper focuses on the behaviour of institutional investors in the Chinese stock market and quantifies their “group holding” behaviour. Using the Shannon entropy in network systems, the authors measure institutional investors' stock holdings strategy and internal private information transmission. A time-varying parametric vector autoregressive model between institutional behaviour and secondary stock market trends in China is constructed. The time-varying nature of the variables, response functions, and linkage mechanisms are explored and studied. The results of the data suggest that institutional investors' stock holdings and private information transmission have different mechanisms of influence on stock market trends. In terms of direction, they may diverge; in terms of size, institutional investors' “real money” is more impactful than “gossip”; in addition, they are asymmetrical in their stage of development and heterogeneous in different market conditions.

The effect of financial reporting quality on institutional ownership

ABSTRACT We examined the sophisticated institutional investors’ preference for sustainable investing. Precisely, we examine the link between financial reporting quality and investment behaviour of institutional investors in the context of relatively high level of information asymmetry. The results suggest that sophisticated (i.e. institutional) investors tend to shy away from firms with poor quality of information in financial statements. Our analysis also suggest that an aggregate institutional ownership reduces by 1.2% for every unit decrease in financial reporting quality, and foreign institutional ownership decreases by 1%. Foreign ownership in firms with influential block holders decreases by 3% for every unit decrease in financial reporting quality. Overall, we find that institutional investors avoid relying on trading strategies that enhance returns based on information discovery in markets with high information acquisition costs and liquidity constraints, such as emerging markets.

Sports Mood Index, institutional investors, and earnings announcement anomalies

I construct the Sports Mood Index (SMI) of 49 metropolitan areas in the U.S. and Canada based on the performance of Big 4 professional sports teams and build the firm-level SMI based on institutional investors’ holdings as a proxy for investors’ mood. In sports-induced bad mood settings, earnings announcement premium becomes higher because of increased uncertainty avoidance premium, and post-earnings-announcement drift (PEAD) becomes lower because of the reversal effect. A one-standard-deviation increase in the SMI leads to a 22 bps increase in earnings announcement premium and a 16 bps decrease in PEAD in the following week. Whereas sports-induced good mood has no significant impact on the trading behavior of institutional investors, sports-induced bad mood leads to inattention. Institutional investors with sports-induced bad mood underreact to standardized unexpected earnings when faced with both positive and negative news, as evidenced by lower abnormal trading volume around earnings announcement days.

PORTFOLIO DIVERSIFICATION WITH BITCOIN. EVIDENCE FROM INSTITUTIONAL INVESTORS PERSPECTIVE

The paper investigates the empirical verification of the efficacy of investment diversification using the main stock exchange indices in the Eurozone countries and Bitcoin. The paper also investigates whether and to what extent it is desirable for institutional investors, in addition to traditional financial instruments, to invest in Bitcoin. The aim of the research is to examine whether it is justified and to what extent to include Bitcoin in the portfolio of an institutional investor. Through this research, an attempt is made to find an answer to the research question: “What share of Bitcoin in the portfolio structure is justified, taking into account the ratio of return and risk”? The analysis includes data on the daily movement of selected action indices as well as the movement of Bitcoin. The methodology involves the analysis of high-frequency data, given that daily trading data were used. The results show that it is justified to include Bitcoin in the portfolio structure. Also, the results show which share of Bitcoin in the portfolio is justified from the aspect of institutional investors. The data used in the analysis cover the period from 2019 and 2020. Two portfolios have been created, one without Bitcoin and the other with Bitcoin. The goal in optimization for both portfolios is to minimize risk. The observed period of the analysis is characterized by the crisis caused by the coronary virus pandemic and the period of active bitcoin trading. The results of the research show that Bitcoin is a good source of diversification in a portfolio that contains traditional financial instruments, both for an investor who is not prone to risk, and for those investors who have a greater appetite for risk. The conclusion is that the rational behavior of institutional investors requires consideration of investing in Bitcoin using the Markowitz model. However, given the high degree of volatility, investors should be careful when making decisions about including Bitcoin in their investment portfolio. Bitcoin is an extremely volatile instrument. Given that it is a speculative and highly volatile financial instrument, investors have different views on Bitcoin. First in terms of defining this cryptocurrency and then in terms of including this instrument in the investment portfolio. By including Bitcoin in the investment portfolio, the goal of diversification has been achieved. This is to reduce the risk of the institutional investor to a minimum. In practice, this means that it is possible to create a portfolio that carries an acceptable level of risk with the desired level of return. Given that Bitcoin is an extremely volatile and consequently - risky instrument, the expected return is also - high. The results of the research show that the cryptocurrency Bitcoin can serve as a desirable instrument for diversification of the investment portfolio when looking at a portfolio that includes stock indices. The results suggest that it is desirable to include in the structure of the portfolio a certain share of Bitcoin, about 6%.