Heterogeneous Investors Research Articles

Market Sentiment, Valuation Heterogeneity, and Corporate Investment: Evidence from China’s A-Share Stock Market

ABSTRACT We study the heterogeneous valuation of Chinese A-share stocks caused by high or low market sentiment and its impact on corporate investment during 2005Q3–2015Q2. We divide stocks into three types based on sentiment betas. We find that for “speculative” (and “bond-like”) stocks, overvaluation from high (low) sentiment increases corporate investment, but undervaluation from low (high) sentiment can be arbitraged away; “investment-Q” sensitivity is relatively weak. For “rationally valued” stocks, corporate investment is positively correlated with valuation and has no consistent relationship with market sentiment. However, changes in market sentiment can reduce the reliance of managers’ investment decisions on valuation.

The monitoring role of institutional investors

PurposeThis paper aims to examine the monitoring role of institutional investors in corporate decision-making by classifying financial institutions based on geographical proximity and investment horizon from 1980 to 2014.Design/methodology/approachBy using unique data sets on firm and institution location and investor horizon measure (Gaspar et al., 2005), the authors categorize institutional investors into six proximity-horizon classifications. This method captures the heterogeneity of investors. The corporate decisions assessed include firm investment, financing, payout policy, misbehavior, takeover defenses and profitability.FindingsBoth geographical proximity and investment horizon are directly related to institutional investors' monitoring cost. As a result, the effectiveness of institutional monitoring may vary based on geographical proximity and investment horizon. This paper collectively examines both dimensions of financial institutions and provides evidence that institutional investors present different preferences for corporate policies. Given stronger information advantage, both local and nonlocal investors that are long-term oriented fulfill better roles in monitoring corporate decisions but from different perspectives.Research limitations/implicationsDifferent from previous studies that treat institutional investors homogeneously, this paper provides empirical support that investors are indeed different in influencing firm policies.Originality/valueTo the authors’ best knowledge, this is the first study that classifies investors based on two dimensions, geographical proximity and investment horizon, and examines their joint effects on corporate policies. This proximity-horizon classification allows the authors to better disentangle the effects of institutional ownership structure on the monitoring outcomes.

Opioid Crisis Effects On Municipal Finance

We investigate the effects of opioid abuse on municipal finance. We employ instrumental variables, border discontinuity difference-in-differences regressions, and Coarsened Exact Matching to identify consistent causal effects, controlling for variation in economic conditions and demographics. Opioid abuse lowers credit ratings, increases new offer yields, and reduces bond issuance. Reversal of these effects following effective anti-opioid legislation further supports causality. Differential effects due to investor heterogeneity suggest that opioid abuse affects municipal finance through a capital supply channel. Overall, we conclude that opioid exposure impedes municipalities’ access to capital and thus hurts their ability to provide public services and infrastructure.

The influence of heterogeneous institutional investors on company strategies in emerging countries: Evidence from Brazil

The objective of this study is to evaluate the impact of institutional investor shareholding on strategic corporate management. Focusing on Brazilian non-financial corporations, we consider the het...

Digital Currency Price Dynamics: Sentiments Versus Mining Competition

Cryptocurrency prices fluctuate strongly despite the fact that their supply typically follows mechanical rules. In this paper we focus on two determinants of Bitcoin valuations. Using an agnostic narrative approach to identify exogenous events related to Bitcoin mining (mining shocks) and news affecting investor perception (news shocks), we first show that both types of events have sizable and persistent effects on Bitcoin valuation and aggregate mining activity. We then rationalize our findings in a model with search frictions in which heterogeneous investors can trade Bitcoin but have their transactions validated by competitive miners. The model endogenously generates waiting times and an equilibrium distribution of asset positions, which is driven by competition among miners on validation speed. Finally, we use our model to inform sign restrictions in a structural VAR analysis. We confirm the model narrative and our initial findings that both news and mining shocks significantly and persistently affect Bitcoin valuations.

The Implications of Heterogeneity and Inequality for Asset Pricing

Does heterogeneity matter for asset pricing and in particular for risk premiums? Starting with an irrelevance result, I classify the literature into two groups of papers taking different routes to link investor heterogeneity and risk premiums. The first group contains models of investors who differ in terms of their preferences, beliefs, or access to markets. Despite their differences, these models have similar implications, and can be analyzed in a unified way. The second group of papers consists of models where investors experience uninsurable income shocks. The goal of this survey is to provide one unified framework to better understand this large literature, and especially to reconcile several of the seemingly inconsistent results found in some seminal papers. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Arbitrage, speculation and futures price fluctuations with boundedly rational and heterogeneous agents

This paper proposes a dynamic model for the futures market with three types of investors. The bounded rationality and heterogeneity of investors are taken into consideration. The equilibrium of the system and its stability conditions are derived with mathematical analysis. In the equilibrium, the futures price and the spot price converge to the equilibrium simultaneously. The equilibrium is determined by many factors, including the risk appetite and the rationality of investors, the trading costs, the arbitrage basis price and the fundamental price. When the stability conditions are violated, complex dynamics will emerge in the market. As shown by the simulations, the arbitrage is likely to destabilize the market. Moreover, when investors have the high degree of rationality, the equilibrium will become unstable and the futures market is inefficient. Statistical analysis indicates that the model can reproduce the stylized facts observed in the futures market, such as long memory, volatility clustering and fat tail of returns.

Institutional Investors, Real Earnings Management and Cost of Equity: Evidence from Listed High-tech Firms in China

ABSTRACT This paper investigates the association between real earnings management and the cost of equity from the perspective of the heterogeneity of institutional investors. Based on a sample of publicly listed high-tech firms in China from 2008 to 2017, our empirical results suggest that there is a significant negative correlation between earnings management and the cost of equity capital. This finding is contrary to previous conclusion, indicating that, in China, real earnings management cannot be effectively identified by external investors, and the company could easily obtain financing from the capital market and reduce its cost of equity due to its masked excellent performance by manipulating the real earnings management. Furthermore, we find that compared with transient institutional investors, stable institutional investors with the intention of holding the stock for the long-term can effectively reduce the cost of equity. Our results also show that real earnings management under the supervision of stable institutional investors could be more easily identified by shareholders and stable institutional investors could diminish the impact of earnings management on the cost of equity.

Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk, and transaction costs

AbstractThis paper develops a comprehensive modified cost‐of‐carry model to study the mispricing of Nikkei 225 index futures contracts traded in Osaka, Singapore, and Chicago based on a new 19‐year data set. Using this improved model, we find that dividend clustering, currency risk, and transaction costs all play an essential role in the estimation of Nikkei mispricing. An exponential smooth transition autoregressive‐GARCH model is used to describe the international dynamics of Nikkei mispricing. The results indicate that generally mean reversion in mispricing and limits to arbitrage are driven more by transaction costs than by heterogeneous investors.

Prestige signals and heterogeneity of opinion regarding IPO values: Malaysian evidence

PurposeThe purpose of this paper is to examine the effects of prestige signals measured by the reputations of the underwriter, auditor and board size on the heterogeneity of investor belief about the true value of IPO in the Malaysian IPO market.Design/methodology/approachThis study employs a sample of 281 IPOs issued between January 2000 and December 2015. The relationship between prestige signals and investor heterogeneity, measured by first-day price range of IPOs, is analysed using cross-sectional regression and quantile regression technique.FindingsOf the three prestige signals, the findings show that only underwriter reputation and board size have significant negative relationships with IPO first-day price range. This implies that IPOs underwritten by reputable underwriters and issuing firms with larger board members have lower heterogeneity of opinion among investors. The findings also show that underwriter and auditor reputations have negative relationship with IPO initial return, suggesting that these prestige signals help to reduce IPO under-pricing, which is a direct cost of raising capital for the issuing firm. Furthermore, the results indicate that offer price, initial return, over-subscription ratio and private placement are associated with higher first-day price range. However, the findings on offer size suggest that larger IPO offer size is associated with lower first-day price range. Overall, the findings suggest that firm’s prestige signals reduce opinion heterogeneity among investors and that lower investors’ heterogeneity leads to lower IPO under-pricing cost for issuing firms.Originality/valueDespite the importance of underwriter, auditor and board member reputations in signalling firm’s quality and reducing the level of information asymmetry of the listing firm’s issues, research on the effects of prestige signals on investor heterogeneity remains unexplored. This study investigates the role of prestige signals in influencing investors’ heterogeneity in Malaysia. The authors conjecture that underwriter, auditor and board member with higher reputations are associated with lower levels of opinion heterogeneity among IPO investors.

Ambiguity, Volatility, and Credit Risk

Abstract We explore the implications of ambiguity for the pricing of credit default swaps (CDSs). A model of heterogeneous investors with independent preferences for ambiguity and risk shows that, because CDS contracts are assets in zero net supply, the net credit risk exposure of the marginal investor determines the sign of the impact of ambiguity on CDS spreads. We find that ambiguity has an economically significant negative impact on CDS spreads, on average, suggesting that the marginal investor is a net buyer of credit protection. A 1-standard-deviation increase in ambiguity is estimated to decrease CDS spreads by approximately 6%. (JEL C65, D81, D83, G13, G22) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Stress Testing the Equity Home Bias: A Turnover Analysis of Eurozone Markets

Shifts in equity turnover happen on and around holidays because rationally bounded investors become distracted. Their pattern reveals a persistent equity home bias even in the Eurozone, a stress test case for the survival of this bias given the high level of economic and financial development and integration in this area. The bias is greater for small caps because investors are reluctant to hold this class of foreign asset. Our study corroborates calendar anomalies in trading volumes, but refutes the hypothesis regarding turnover sensitivity to stock returns common in the empirical and theoretical literature based on investor heterogeneity and short sale constraints. Our results reveal vanishing cost asymmetries in taking long rather than short positions.

Stress testing the equity home bias: A turnover analysis of Eurozone markets

Shifts in equity turnover happen on and around holidays because rationally bounded investors become distracted. Their pattern reveals a persistent equity home bias even in the Eurozone, a stress test case for the survival of this bias given the high level of economic and financial development and integration in this area. The bias is greater for small caps because investors are reluctant to hold this class of foreign asset. Our study corroborates calendar anomalies in trading volumes, but refutes the hypothesis regarding turnover sensitivity to stock returns common in the empirical and theoretical literature based on investor heterogeneity and short sale constraints. Our results reveal vanishing cost asymmetries in taking long rather than short positions.

Hedging performance and the heterogeneity among market participants

PurposeThis paper aims to apply the heterogeneous autoregressive model of realized volatility (HAR-RV) model to minimum-variance hedge ratio estimation and compares the hedging performance of presenting a model with that of a conventional rolling ordinary-least-square (OLS) hedging model. Moreover, this paper empirically analyzes the relationship between hedging performance and the heterogeneity of investors with different trading frequency in forming the expectation for the spot volatility, futures volatility and the covariance in the market.Design/methodology/approachUse HAR-RV to form expectations of participants of spots and futures market for the next period volatility based on two parts. One is the current observable realized volatility at the same time scale. The other is the expectation for the next longer time scale horizon volatility. Compare hedging performance with rolling OLS model and HAR-RV model. Present a three-times-scale-length (daily, weekly and monthly) HAR-RV model for the spot and futures returns and volatility to analyze the relationship between the hedging performance and the heterogeneity among participants in each market.FindingsThe empirical results show that HAR-RV model outperforms the rolling OLS in terms of variance reduction and expected utility in the out-of-sample period. The results also indicate that the greater variance reduction occurs when investors with different trading frequency have a less heterogeneous expectation for spot volatility and more heterogeneous expectation for futures volatility and the covariance. In addition, the expected utility increases along with lower heterogeneity in spot volatility and higher in futures volatility and the covariance. Hedging performance improves along with decreasing heterogeneity of investors in spot volatility and increasing heterogeneity in futures volatility and the covariance.Originality/valueThis paper considers the heterogeneity of participants in spot and futures market, the authors apply HAR-RV model to MVHR estimation and compare the hedging performance of presenting a model with that of conventional rolling OLS hedging model, providing more evidence in hedging literature. This paper analyzes in depth the relationship between hedging performance and the heterogeneity in the market.

Determinants of household broker choices and their impacts on performance

Abstract We use Finnish OMX Helsinki data to examine the relationship between demographic variables, individual investors' broker choices and trade informativeness. We find that men prefer to use Full-Service-Retail over Discount-Retail brokers and that a higher level of income leads to a higher likelihood of using Discount-Retail brokers. Women present more heterogenous broker choice behaviors. However, both genders are more likely to carry out larger trades through Discount-Retail brokers. We show that trades executed via Discount-Retail brokers are more informative than those of Full-Service-Retail brokers and that only Discount-Retail brokers show trade informativeness differences across gender after controlling for age. Collectively, women make more informative trades then men, but this result reverses after partitioning by age. We conclude that conditioning on the type of broker reduces unobserved individual investor heterogeneity and that demographic variables are essential to the understanding of broker clientele effect. Furthermore, clientele differences observed across broker types are market specific and dominate the effects of financial advice in determining trade informativeness.

Exchange rates change, asset-denominated currency difference and stock price fluctuation

ABSTRACTThis paper examines differences in the connectedness between exchange rates and stock prices for companies with different asset currencies on the Hong Kong stock market, and it seeks to explain those differences by proposing a hypothesis on asset-denominated currency difference. Under a framework of investor heterogeneity, we establish a dynamic, discrete theoretical model to analyse the connectedness between exchange rates, the stocks of local Hong Kong companies, the stocks of companies from the mainland and foreign exchange interventions. Using monthly data from January 2000 to August 2018, we adopt the time-varying parameter vector auto-regression (TVP-VAR) model to empirically study the dynamic relationships between exchange rates and the prices of both Hong Kong-based and mainland-based stocks. The results show significant differences in the ways that exchange rates and prices for the two types of stocks are linked. The exchange rates are positively correlated with mainland stocks and negatively correlated with Hong Kong stocks. Moreover, foreign exchange intervention is found to be an effective means for stabilising exchange rates, although such intervention tends to increase stock volatility.Abbreviations: TVP-VAR - time-varying parameter vector auto-regression model; MCMC - Monte Carlo-Markov Chain method.

Dynamics between trading volume, volatility and open interest in agricultural futures markets: A Bayesian time-varying coefficient approach

The dynamics between trading volume and volatility for seven agricultural futures markets are examined by drawing on the large literature for equity markets and by allowing for heterogeneity of investors beliefs proxied by open interest. In addition, time-varying effects on the transmission mechanism of shocks are also accounted for by implementing a Bayesian VAR model, which allows for time-variation stemming from both the coefficients and the variance covariance structure of the model’s disturbances. This is important since it accounts for changes in the number of trades and the size of trades across different periods, which can have different effects on the volatility-volume relation. The results show that the Granger causality and the reaction to shocks varies substantially over time. This highlights the importance to allow for time-variation when modeling the relationship between volatility, trading volume and open interest for agricultural futures markets. In general, the findings indicate that volatility of agricultural futures markets is driven by previous period’s trading volume and open interest. However, the reversed relationship from lagged volatility to trading volume and open interest is limited to certain periods of time.

The effect of share ownership structure on ex-dividend day stock price behavior

PurposeThe purpose of this paper is to explore whether share ownership structure plays a role in determining the ex-day pricing of dividends. If share ownership structure, specifically the proportion of the firm’s stock held by individuals vs institutions, has an effect on the ex-dividend day stock price behavior, the ex-day premium is expected to be different for firms with different ownership structures.Design/methodology/approachTo investigate whether the ex-day pricing of dividends is affected by the proportion of the firm’s stock held by individuals vs institutions, the author look into the ex-day premium. The ex-day premium is calculated by dividing the difference between the closing price on the cum-dividend day and the closing price on the ex-dividend day by the amount of the dividend.FindingsConsistent with both the tax-based theory and the dynamic trading clientele theory, the author find that the ex-day premium decreases with the level of individual ownership. Consistent with the short-term trading theory, the author also find that the ex-day premium increases with the degree of investor heterogeneity, defined as the product of the proportion of the firm’s stock held by individual investors and the proportion held by institutional investors.Originality/valueThe author believe that this study contributes to the literature by providing useful evidence that share ownership structure affects the ex-day pricing of dividends, and thus this study will be of interest to the readers of managerial finance.

Can Institutional Investors Improve Voluntary Management Earnings Forecasts?

ABSTRACT We use data from 2010 to 2016 on listed companies in China to study the relationship between heterogeneous institutional investors and voluntary management earnings forecasts. We find that active institutional investors have a significantly negative influence on voluntary management earnings forecast only when the proportion of active institutional investors is in the upper 50 quartiles. Further studies show that, first, the inhibitory effect of active institutional investors on voluntary earnings forecasts mainly affects speculative active institutional investors and unstable active institutional investors. Second, boards that function better can significantly reduce the inhibitory effect of active institutional investors on the company‘s voluntary disclosures, and this inhibition occurs only with boards that do not have good governance. We also find that the overall shareholding of institutional investors significantly inhibits the company‘s voluntary management earnings forecasts, indicating that institutional investors should improve their supervision and governance role in voluntary management earnings forecasts at listed companies in China.

A tug of war: Overnight versus intraday expected returns

We link investor heterogeneity to the persistence of the overnight and intraday components of returns. We document strong overnight and intraday firm-level return continuation along with an offsetting cross-period reversal effect, all of which lasts for years. We look for a similar tug of war in the returns of 14 trading strategies, finding in all cases that profits are either earned entirely overnight (for reversal and a variety of momentum strategies) or entirely intraday, typically with profits of opposite signs across these components. We argue that this tug of war should reduce the effectiveness of clienteles pursuing the strategy. Indeed, the smoothed spread between the overnight and intraday return components of a strategy generally forecasts time variation in that strategy’s close-to-close performance in a manner consistent with that interpretation. Finally, we link cross-sectional and time-series variation in the decomposition of momentum profits to a specific institutional tug of war.