Institutional Investors Trade Research Articles

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 are 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.

Are Analyst “Top Picks” Informative?

Abstract Following the Global Settlement, analysts extensively use a top pick designation allowing for greater granularity of information among buy recommended stocks, but conflicts of interest can potentially influence this designation. Examining a novel sample of top picks, we find that a calendar-time portfolio of top picks generates an abnormal performance of 17.6% per year. Top picks have greater investment value than do buy recommendations and alternative analyst investment strategies. Both institutional and retail investors trade in response to top picks. However, only institutional investors appear to identify top picks that have greater investment value when they are announced.

Why does operating profitability predict returns? New evidence on risk versus mispricing explanations

AbstractThis study develops new evidence on risk versus mispricing explanations of the well‐known profitability premium. First, we examine whether exposure to expected downside risk is a plausible explanation. We find that high profitability is associated with both lower ex ante and ex post probabilities of future price crashes. Thus, less profitable firms exhibit greater downside risk than highly profitable firms, making a downside risk explanation implausible. Although this fact is overlooked by the market in general, it is anticipated by options traders; we find that put options of low profitability firms are relatively more expensive. Simultaneously, these firms do not exhibit greater probability of jumps, indicating that volatility(risk)‐based explanations for the profitability premium are unlikely to be descriptive. Second, we find that the sticky‐expectations model of Bouchaud et al. (2019, The Journal of Finance, 74, 639–674) only partially explains the profitability premium. While on average, analysts' forecast revisions correct in the same direction as recent profitability, the profitability premium still exhibits a strong relationship to the non‐sticky component of analysts' forecast revisions. Third, institutional investors trade profitability‐based signals but do so with a delay, likely contributing to the premium. Overall, our evidence favours the explanation that the profitability premium is related to investor mispricing of potential downside risk and provides greater clarity on recent findings in the literature.

Institutional Investor Trading and Stock Price Informativeness: Empirical Evidence from the Vietnamese Stock Market

Bài viết nghiên cứu ảnh hưởng của giao dịch mua bán cổ phiếu của nhà đầu tư tổ chức đến tính thông tin của giá cổ phiếu của các doanh nghiệp niêm yết Việt Nam. Kết quả chỉ ra rằng giao dịch của nhà đầu tư tổ chức truyền tải các thông tin nội bộ của doanh nghiệp đến thị trường, từ đó làm tăng tính thông tin của giá cổ phiếu. Bên cạnh đó, giao dịch mua của nhà đầu tư tổ chức chứa đựng các tín hiệu tích cực về giá cổ phiếu. Tín hiệu này làm gia tăng giao dịch mua của các nhà đầu tư khác, dẫn đến lợi suất bất thường sau ngày thông báo mua cổ phiếu của nhà đầu tư tổ chức.

The Differential Effects of Non-Reliance Restatements on Retail and Institutional Investor Trading

The Differential Effects of Non-Reliance Restatements on Retail and Institutional Investor Trading

Retail and Institutional Investor Trading Behaviors: Evidence from China

Retail and Institutional Investor Trading Behaviors: Evidence from China

Role of Corporate Governance to Restrict Tunneling Activities of Foreign Institutional Investors in the Pakistan Stock Market

ABSTRACT The research objective is to determine the curvilinear influence of trading of foreign institutional investors (FIIs) on the extent of tunneling, while corporate governance moderates this relationship. Data was gathered from 50 non-financial firms for 11 years (2009 to 2019) from the Securities and Exchange Commission of Pakistan. The generalized method of moments (GMM) was applied and results supported the objectives of this study. Involvement of FIIs may contribute to the enhancement of market discipline but may also create problems. Thus, policymakers require protecting the rights of minor shareholders against adverse influence.

Large transactions and the MAX effect: Evidence from China

In this paper, we confirm the existence of the maximum daily return (MAX) effect in the Chinese stock market. Furthermore, we find that MAX is driven by large transactions whereby their increasing relative transaction volume triggers the MAX effect. This paper proposes the economic mechanism for the MAX effect as follows: institutional investor trading increases first, which causes individual investors to follow so that the total transaction volume increased, finally the MAX effect formatted. After the daily stock return reaches its monthly highest, the institutional trading quickly decays. By contrast, trading by retail investors decreases much slower after the MAX day.

Are Analyst Short‐Term Trade Ideas Valuable?

ABSTRACTShort‐term trade ideas are a component of analyst research highly valued by institutional investors. Using a novel and comprehensive database, we find that trade ideas have a stock price impact at least as large as recommendation and target price changes. Trade ideas based on expectations of future events are more informative than those identifying incomplete incorporation of past information in stock prices. Analysts with better access to a firm's management produce better trade ideas. Institutional investors trade in the direction of trade ideas. Investors following trade ideas can earn significant abnormal returns, consistent with analysts possessing valuable short‐term stock‐picking skills.

Non‐Deal Roadshows, Informed Trading, and Analyst Conflicts of Interest

ABSTRACTNon‐deal roadshows (NDRs) are private meetings between management and institutional investors, typically organized by sell‐side analysts. We find that around NDRs, local institutional investors trade heavily and profitably, while retail trading is significantly less informed. Analysts who sponsor NDRs issue significantly more optimistic recommendations and target prices, together with more “beatable” earnings forecasts, consistent with analysts issuing strategically biased forecasts to win NDR business. Our results suggest that NDRs result in a substantial information advantage for institutional investors and create significant conflicts of interests for the analysts who organize them.

Firm, institutional and short sellers’ trading behavior around share repurchases

PurposeThis study investigates the valuation motive for increasing share repurchases: the authors analyze the trading dynamics between short sellers, institutional investors and the firm itself around share repurchases.Design/methodology/approachThe authors examine the valuation motive for share repurchases through an analysis of firm, institutional and short sellers’ trading behavior. The firm-level panel regression models using firm-quarter observations in the sample period are estimated.FindingsThe authors find that firms repurchase more intensely against increased short selling and that institutional investors trade in parallel with the repurchasing firm.Originality/valueResults suggest that firms disagree with short sellers’ intrinsic valuation of the firm, which is consistent with findings of recent studies such as Muzere (2019) and Bargeron and Bonaimé (2020).

What Is the True Valuation Motive for Increasing Share Repurchases? An Analysis of Firm, Institutional and Short Selling Trading Behavior

This study investigates the valuation motive for increasing share repurchases: we analyze the trading dynamics between short sellers, institutional investors, and the firm itself around share repurchases. We find that firms repurchase more intensely against increased short selling and that institutional investors trade in parallel with the repurchasing firm. Results suggest that firms disagree with short sellers’ intrinsic valuation of the firm, which is consistent with findings of recent studies such as Muzere (2019) and Bargeron and Bonaime (2020).

How do investors trade R&D-intensive Stocks? Evidence from hedge funds and other institutional investors

We examine how institutional investors trade stocks with high research and development (R&D) expenses and investigate whether they can detect value-relevant R&D. We document significant differences between hedge funds and other institutional investors in their trading in high R&D stocks. We find that hedge funds (other institutional investors) invest more (less) in high R&D stocks compared to all other stocks. Moreover, hedge funds exhibit strong stock-picking ability in high R&D stocks, and hedge funds with larger allocations to high R&D stocks generate higher future fund returns. Our findings suggest that hedge funds have superior skill in identifying value-relevant R&D.

Do short‐term institutions exploit stock return anomalies?

AbstractThe literature documentsthat institutional investors in aggregate trade in the “wrong” direction of stock return anomalies. This paper explains the puzzle by isolating active institutions with a shorter‐term investment horizon (“short‐term institutions”). Based on 10 well‐known stock return anomalies, we find that these short‐term institutions indeed exploit anomalies. The results established in the literature are mostly driven by institutions with a longer‐term investment horizon, who are likely more interested in long‐run financial performance. In addition, given that institutional investors are momentum traders, we examine separately how institutional investors trade on momentum and contrarian anomalies. We show that institutions generally trade in the right direction on momentum anomalies but wrong direction on contrarian anomalies. However, over relatively short trading windows, short‐term institutions trade in the right direction of both momentum and contrarian anomalies. Furthermore, we show evidence that when short‐term institutions exploit anomalies, their trades generate significantly positive abnormal returns. Our results also imply that trading by short‐term institutions appears to be subject to liquidity provision by long‐term institutions.

Underwriters’ price support regulation and institutional investors’ trading: The case of the putback option

We examine a period in Korea during which a price supporting regulation called the putback option was imposed on the IPO underwriter. Under the regulation, individual investors of IPO had put options which can be exercised at 90% of IPO price. We find that during the regulation period, institutional investors’ flipping activity is evident not on the days following the IPO but on the days following the expiration of putback option. Our study shows that the regulation results in merely delaying the institutional investors’ documented trading behavior and provides evidence that the relationship between the underwriter and the institutional investors affects the trading of institutional investors.

Non-Deal Roadshows, Informed Trading, and Analyst Bias

Non-deal roadshows (NDRs) are private meetings between management and institutional investors, typically organized by sell-side analysts. We find that around NDRs, local institutional investors trade heavily and profitably, while retail trading is significantly less informed. Analysts who sponsor NDRs issue significantly more optimistic recommendations and target prices, coupled with more “beatable” earnings forecasts, consistent with analysts issuing strategically biased forecasts in order to win NDR business. Our results suggest that NDRs result in a substantial information advantage for institutional investors and create significant conflicts of interests for the analysts that organize them.

Private Information behind Insider Trades: Evidence from Cross Section and Time Series

We examine the private information associated with insider trades using a Chinese data set. Insider buys positively forecast individual stock returns and insider sales negatively forecast individual stock returns. Classifying insiders as corporate managers and institutional investors, we find that the trades by these two types have different asset pricing implications. Cross-sectionally, stocks more heavily bought by corporate managers have higher average returns compared to their less-bought counterparts, but institutional investor trading has no impact on cross-sectional differences in average returns. The economic value of institutional investors’ trades primarily derives from their time-series return predictability, as the collective buy-to-sell ratio of institutional investors significantly forecasts market returns. In contrast, the buy-to-sell ratio of corporate managers shows no predictive power.

Misinformation corrections of corporate news: Corporate clarification announcements

We study the effect of decision making through misinformation correction of financial news through corporate clarification announcements. We adopt the quantile regression method and use signal detection theory for the study period 2008 to 2018. Misinformation corrections significantly influence the buy- and sell-side trading of qualified foreign institutional investors (Qfii), investment trust companies (Trust), and dealers across quantiles. Misinformation corrections with identified sources have a significant negative influence on institutional investors' decision making across quantiles, whereas those without identified sources show mixed influences. Brief and long-length written clarifications have a significant positive influence on misinformation correction for decision making across quantiles, while those of mid-length have a contrary effect at low and mid quantiles. Misinformation correction in newspapers has a significant negative influence on decision making, but financial newspapers and other sources show the contrary. Multi-purpose newspapers negatively and significantly influence misinformation correction, whereas economic newspapers display insignificant influences. Investment and retained-earnings related clarifications, negatively and positively, significantly influence misinformation correction for decision making, respectively. While technology-related industries indicate positive information signaling and learning from other sources and retained-earnings related clarifications, their counterparts show the opposite from financial newspapers and investment related clarifications. This study identifies the influence of misinformation correction by relating source monitoring and textual analysis. Information signaling has a more significant influence than information learning for the overall market, whereas the contrary is observed for industry segmentations. This study sheds light on misinformation correction strategies and methods. This study sheds light on misinformation correction strategies and methods.

Limited Attention Bias and Institutional Investor Characteristics

We test for limited attention bias in institutional investor trading, when news is stale. Using the universe of transaction-level data in the U.S. corporate bond market around stale downgrades, we find an abnormal increase in trading volume, abnormal bond returns and a subsequent reversal. We do not find a reversal for abnormal bond returns associated with informative rating actions. We then focus on the largest, domestic, institutional investors, thus matching investor characteristics to individual transactions. We document an association between restatements and abnormal trading on stale news. These results provide supportive evidence that limited attention bias affects institutional investors.

How Do Investors Trade R&D-intensive Stocks? Evidence from Hedge Funds and Other Institutional Investors

We examine how institutional investors trade stocks with high research and development (R&D) expenses and investigate whether they can detect value-relevant R&D. We document significant differences between hedge funds and other institutional investors in terms of their trading in high R&D stocks. We find that hedge funds (other institutional investors) invest more (less) in high R&D stocks compared to low R&D stocks. Moreover, while hedge funds have strong stock-picking ability in high R&D stocks, other institutional investors do not show any evidence of stock-picking ability. Our findings suggest that hedge funds have differential skillset to better identify the value-relevant R&D.