Heterogeneous Investors Research Articles

Commitment and investment distortions under limited liability

We study how frictions originating from limited liability distort firms' investment and financing choices. By financing new investments with debt, firms can use limited liability to credibly commit to defaulting earlier—allowing both firm owners and new creditors to benefit from diluting existing creditors. In a dynamic setup, this leads to time-inconsistency, increasing the cost of external funds and discouraging investment. We show that the interaction of these two forces leads to heterogeneous investment distortions, where highly-indebted firms overinvest and those with low levels of debt underinvest. Allowing firm owners to pay themselves directly from new debt issuance can mitigate overinvestment but, in the presence of repeated investment opportunities, tends to exacerbate underinvestment among low-leverage firms.

Retail and Institutional Investor Trading Behaviors: Evidence from China

We study two important questions regarding trading dynamics in China: How do retail and institutional investors trade, and what are the underlying factors for these behaviors? Different from the United States, China's stock market has two prominent features: dominance of retail investors and active participation by the government. After reviewing nearly 100 previous studies, we reach three conclusions. First, there is substantial heterogeneity in retail investors. Small retail investors have low financial literacy, exhibit behavioral biases, and not surprisingly, negatively predict future returns, whereas large retail investors and institutions are capable of processing information and positively predict future returns. Second, the macro- and firm-level information environment in China is slowly but gradually improving, which greatly affects trading behaviors of different investors, especially the more sophisticated institutional investors and large retail investors. Finally, the Chinese government actively adjusts their regulations on the stock market to serve the dual goals of growth and stability. Many regulations are effective, while some may generate unintended consequences.

Comparative Valuation Dynamics in Production Economies: Long-Run Uncertainty, Heterogeneity, and Market Frictions

We compare and contrast production economies exposed to long-run uncertainty with investors that have possibly different preferences and/or access to financial markets. We study the macroeconomic and asset-pricing properties of these models, identify common features, and highlight areas where these models depart from each other. Our framework allows us to investigate more fully the impact of investor heterogeneity, capital heterogeneity, and fluctuations of the growth components to the capital evolution as they affect the dynamics of macroeconomic quantities and asset prices. In our comparisons, we employ an array of diagnostic tools to explore time variation and state dependencies in nonlinear environments.

Investor horizon, experience, and the disposition effect

The disposition effect, characterized by the tendency to sell winning assets too soon and hold onto losing assets for too long, is a widely documented phenomenon among investors. Using granular trade-level data, we examine the disposition effect among different categories of foreign institutional investors (FIIs) in the context of an emerging market. Using survival analyses over several years, we find that short-term investors are most prone to disposition effects, while long-term investors are least prone. We also find that experience, as indicated by cumulative years in the market and the volume of stocks traded, mitigates the disposition effects, but only among long-term FIIs. While FIIs exhibit higher disposition effects during crisis periods, this effect is mitigated by experience, particularly among long-term FIIs. Our findings suggest that accounting for heterogeneity in institutional investors, rather than treating them as a whole, is important for a better understanding of financial markets.

Particle swarm optimization with historical return decay enhances cooperation in public goods games with investment risks

In the realm of spatial public goods games, heterogeneous investment has emerged as a potent mechanism to enhance cooperative behavior. Savvy investors dynamically adjust their investment levels to optimize returns based on environmental conditions and personal circumstances. This study delves into the evolution of cooperation within a spatial public goods game framework, characterized by heterogeneous investment and associated risks, conducted on a square lattice. We introduce the investors (I) with heterogeneous investment, who updates his investment amount according to the current environment of the game and his own historical experience. We introduce a particle swarm optimization algorithm with decaying historical returns to fine-tune the investment levels of investors. Furthermore, a risk mechanism inspired by the ultimatum game is integrated into the model. This paper investigates the impact of the risk threshold θ on cooperative behavior and examines the influence of the risk decay factor α on cooperation. Additionally, it analyzes the investment behavior of investors in scenarios where two types of investors coexist. Finally, this study explores the effects of the historical best payoff decay factor β and the self-learning rate c1 on cooperative behavior. This research contributes to a nuanced understanding of heterogeneous investment behaviors in public goods games under specified risk mechanisms, providing novel insights into the intricate dynamics of cooperation in complex systems.

The Portfolio‐Driven Disposition Effect

ABSTRACTThe disposition effect for a stock significantly weakens if the portfolio is at a gain, but is large when it is at a loss. We find this portfolio‐driven disposition effect (PDDE) in four independent settings: U.S. and Chinese archival data, as well as U.S. and Chinese experiments. The PDDE is robust to a variety of controls in regression specifications and is not explained by extreme returns, portfolio rebalancing, tax considerations, or investor heterogeneity. Our evidence suggests that investors form mental frames at both the stock and the portfolio levels and that these frames combine to generate the PDDE.

Valuing Financial Data

Abstract How should an investor value financial data? The answer is complicated because it depends on the characteristics of all investors. We develop a sufficient statistics approach that uses equilibrium asset return moments to summarize all relevant information about others’ characteristics. Our approach values public or private data, data about one or many assets, and data relevant for dividends or sentiment. While different data types, of course, have different valuations, heterogeneous investors also value the same data very differently. This finding suggests a low price elasticity for data demand. Heterogeneous investors’ data valuations are also affected very differentially by market illiquidity.

Investor heterogeneity and global stock market participation

To what extent does investor heterogeneity influence decision to invest in stock market? We address this question by drawing on the behavioural economics literature and analyse the impact of national culture on stock market data of forty seven countries spanning from 2000 to 2022. Our findings demonstrate that investors’ heterogeneity significantly accounts for the variation in stock market participation and the results remain consistent despite many robustness checks.

Resolving Tensions Between Heterogeneous Investors in a Startup

Legal scholars highlight the tensions that exist between different classes of shareholders in startups. We model a startup owned by undiversified investors with heterogeneous capital contributions and risk preferences. A social planner runs the firm on behalf of all investors. We compare investors’ expected utility with a hypothetical first-best decentralized benchmark. The startup’s optimal investment policy is procyclical and a time-varying weighted average of shareholders’ optimal investment policies. The optimal contracts issued to investors are tailor-made, interdependent, and include equity claims resembling preferred stock with heterogeneous payout caps, leading to a complex capitalization table as more investors join the startup. This paper was accepted by Will Cong, finance. Funding: This work was supported by the Cambridge Endowment for Research in Finance and Keynes Fellowship. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2022.01724 .

How does strategic deviation affect firm performance? The roles of financing constraints and institutional investors

PurposeThis study investigates the economic outcomes of the strategic deviation (SD), the fundamental and crucial question in institutional theory and strategic management. Previous studies have yielded contradictory findings. This study reconciles conflicting results by distinguishing the effects of the SD on financial and market performance, examining the mechanism of financing constraints and the boundary condition of institutional investor heterogeneity.Design/methodology/approachThis research collected data from Chinese A-shares listed manufacturing firms from 2009 to 2021 from the CSMAR and Wind databases. This study conducted empirical tests using OLS models with Stata 15.FindingsEmpirical results demonstrate that the SD has different impacts on different dimensions of performance. The SD negatively impacts financial performance while positively impacts market performance. Financing constraints mediate the main effects. Moreover, transactional institutional investors positively moderate the negative effect of the SD on financial performance, whereas stable institutional investors negatively moderate the positive effect of the SD on market performance.Originality/valueBy systematically revealing how the SD has different effects on financial and market performance, this study reconciles the debate on the SD between institutional theorists and strategy scholars. This research makes contributions to the research stream by providing reasonable explanations for conflicting conclusions. Furthermore, by introducing the overlooked perspective of financing constraints, this research identifies crucial mediating mechanisms and highlights the double-edged effect of financing constraints, enriching our understanding of financing constraints. Finally, this study investigates the moderating effects of institutional investor heterogeneity, thereby making valuable contributions to the comprehension of boundary conditions.

Institutional investor heterogeneity and green innovation in China: Does digital transformation matter?

This paper examines how different categories of institutional investors influence green innovation for Chinese-listed companies and investigates the impact of digital transformation on this relationship. Results show that pressure-insensitive investors significantly improve corporate green innovation, while pressure-sensitive institutions have no effect. Further evidence suggests this is due to the negative impact of long-term pressure-sensitive investors on green innovation. We further analyze whether digital transformation affects the relationship between institutional ownership heterogeneity and green innovation. Consistent with the view that digital transformation promotes timely information dissemination and alleviates information asymmetry, our findings demonstrate that both pressure-insensitive institutional investors and short-term pressure-sensitive institutional investors promote green innovation in firms with higher levels of digital transformation. Further analyses reveal that digital transformation at the city level amplifies the influence of institutional investors on green innovation, and the underlying technology architecture provides more value to the institutional ownership heterogeneity−green innovation nexus.

Heterogeneous trading behaviors of individual investors: A deep clustering approach

While individual investors may have more diverse preferences and trading behavior than institutional investors due to their lack of professional education, many studies tend to lump individual investors together or classify them by socio-demographic characteristics. We conducted an empirical study using account-level trading data for over 300,000 investors in the Korean stock market from 2016 to 2020 to analyze the heterogeneity of individual investors. Our findings reveal notable disparities in profit distributions among the clusters formed based on investors' trading behavior. Therefore, this study emphasizes the importance of exploring the heterogeneity of individual investors to understand their behavior better.

중국의 해외직접투자(OFDI)가 국가 이미지를 향상 시키는가?

Building the national image is the core of building China's soft power. This paper used the survey data of the PEW Research Center as the data for evaluating China's national image, and used the foreign direct investment (OFDI) data from 2009 to 2019 to empirically analyze the relationship between OFDI and the improvement of China's national image and the mechanism by which OFDI affects the national image. The research results show that OFDI plays an important role in promoting the improvement of China's national image, and the robustness test further verified related conclusions. In the mechanism verification, it was found that OFDI contributes to promoting the improvement of China's national image through the promotion effect of economic and social development, the effect of social responsibility, and the improvement of public opinion. According to additional analysis, OFDI's effects on improving the national image include ‘heterogeneous investment motivation’, ‘investment stage’, and ‘investment contracts and political affinity’, and ‘time effect’ and ‘distance effect’ on improving the national image. The research results of this paper are expected to contribute to providing the basis for standards and decision-making for building and improving China's national image, and to make a policy contribution to improving China's external image and deadlocked Korea-China relations.

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.

The impact of solar PV subsidies on investment over time - the case of Sweden

Over the past decade, different economic incentives have been created to increase investments in solar photovoltaics (PV). Although research outlines that investors in renewable electricity technologies (RET) are heterogeneous, policies have not taken this into account when designing subsidy programs. This paper aims to analyse the relationship between policy incentives and the willingness to invest in PV systems for different investor groups, including households, companies, associations, and public organizations. Using data from all applications to the capital subsidy program for PV in Sweden between 2009 and 2021, we analyse the impact of the subsidy level on investments over time. Our analysis shows that the subsidy has had a positively significant impact for households and private companies as investor groups. However, we also found that other variables have had a significantly positive or negative effect on the willingness to invest for different investor groups. This stresses the need of going from “one size fits all” policies to policies that better adapted to different investor characteristics. To meet the urgent need to accelerate the diffusion of RETs, our results show the impact of investor heterogeneity on policy responsiveness and provide avenues for the design of targeted policies.

A Contingency View of Impression Management: Heterogeneous Investor Responses to CEO Positive Portrayal of Mergers and Acquisitions

AbstractExisting research has suggested seemingly contradictory conclusions about the efficacy of impression management (IM) tactics. While a growing body of research highlights the potential benefits of IM, other studies imply that the effectiveness of these tactics in shaping stakeholder perceptions may be limited. Our study advances theory on IM by drawing upon expectancy violations theory to develop a contingency theory of IM efficacy. Concentrating on CEOs’ positive portrayal of merger and acquisition (M&A) activity, we hypothesize that the effectiveness of this IM tactic hinges on factors related to the communicator (CEO duality), context (acquisition foreshadowing), and audience (investor type). Our results indicate that investor reactions to CEOs’ positive portrayal are more favourable when M&A activity has been foreshadowed or when the institutional investor is transient. Conversely, reactions are less favourable for CEOs also serving as board chair. Our findings provide novel insights into IM theory, suggesting that potential expectancy violations associated with IM tactics could be shaped by the attributes of communicator, context, and audience.

Investor heterogeneity and anchoring-induced momentum

This paper investigates how anchoring-induced investors’ trading behavior drives momentum anomaly. The results show that price momentum does not retain its ability to predict future returns after considering the stock’s nearness to its 52-week high. The stock price’s nearness to the 52-week high is a stronger return predictor for stocks with a higher retail trading proportion. This suggests an anchoring-induced momentum pattern, which is affected by investor heterogeneity. Our trading flow analysis reveals that retail investors are subject to anchoring bias. Their trading behavior causes price underreaction to good (bad) information for stocks traded near (far from) their 52-week high.

The highest-lowest price range and the cross-sectional returns predictability

ABSTRACT Motivated by literature on heterogeneous investors, we use the difference between the highest and lowest prices to proxy the intensity of competition among bullish-bearish investors and investigate its significance in the cross-sectional pricing of stocks. Portfolio-level analyses and cross-sectional regressions indicate a negative and significant relation between the intensity of competition among investors and stock returns in the next month. Average raw returns differences between stocks in the lowest and highest deciles are 0.86% per month, and risk-adjusted returns differences are nearly 1% per month. These results are robust to size and value effects which are important two characteristics related to future returns. To explain it, we link this anomaly with risk compensation and investor mispricing. The results show that risk compensation explanation is excluded. We find that this anomaly is stronger for stocks with lower shareholding of institutional investors, higher market volatility, higher investor sentiment, and larger retail investors. Therefore, we conclude that this anomaly is caused by mispricing.

Distortions Caused by Lending Fee Retention

Some mutual funds retain a fraction of securities lending income by employing in-house lending agents. In a model with heterogeneous investors and endogenous delegation to mutual funds, we show that a subset of funds optimally engages in lending fee retention and as a result, overweights high lending fee stocks that endogenously underperform. We find empirical evidence consistent with our model’s predictions; active mutual funds we identify as fee retainers invest more in high-fee stocks and underperform relative to both nonretaining and nonlending funds. We also show that fee retention helps explain the negative relation between lending fees and future fee-inclusive stock returns. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.01390 .

Performance Evaluation Disagreement

This paper studies investor disagreement in the performance evaluation of equity mutual funds by comparing two existing approaches and estimating its relations with fund characteristics, active management level and fund flows. We find that investors disagree more about the performance of funds that have higher expense ratio and turnover, lower manager tenure and dividend yield, and that are older, smaller and part of a larger family. Disagreement is also higher for funds that follow riskier investment style strategies and deviate more from their benchmarks. Finally, larger disagreement leads to more net fund flows. These findings suggest that heterogeneous investors do not value funds with aggressive active trading strategies similarly, and that favorable valuations by some clienteles result in positive demands for this type of management.