Institutional Trading Performance in a Retail Investor Dominated Emerging Market

43 Pages Posted: 9 Mar 2011

See all articles by Wei Li

Wei Li

Hong Kong Polytechnic University - School of Accounting and Finance

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Steven Shuye Wang

School of Business, Renmin University of China

Date Written: March 8, 2011

Abstract

In this study, we use daily trading data to investigate the performance of institutional investors in the Chinese stock market, which is dominated by retail investors. We find that stocks with intense institutional net buying significantly outperform those with intense institutional net selling by an annual average premium of 15%, a cumulative abnormal return of 165%, or a market-adjusted cumulative value of RMB 9.9 billion over the sample period. The superior institutional performance holds even after controlling for common risk factors and transaction costs; it is also robust to monthly, quarterly, and semi-annually rebalanced portfolios. In addition, consistent with the informational trading hypothesis, we find that institutional trades have incremental explanatory power for return co-movement. In fact, this explanatory power is more pronounced for monthly rebalanced portfolios than for semi-annually rebalanced portfolios, and it is stronger for buying percentage than for selling percentage. Further analysis indicates that institutions tend to trade stocks that are larger in size, have a higher excess return, and have a lower systematic risk. Institutions tend to buy stocks with less firm-specific risks and sell stocks with higher firm-specific risks. All of our findings suggest that the superior performance of institutions can be attributed to their prudential investment preference, superior stock picking ability, and informational advantage.

Keywords: institutional trades, performance, persistence, information

JEL Classification: G11, G12, G14

Suggested Citation

Li, Tina Wei and Rhee, S. Ghon and Wang, Steven Shuye, Institutional Trading Performance in a Retail Investor Dominated Emerging Market (March 8, 2011). Available at SSRN: https://ssrn.com/abstract=1781036 or http://dx.doi.org/10.2139/ssrn.1781036

Tina Wei Li

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

Steven Shuye Wang (Contact Author)

School of Business, Renmin University of China ( email )

Beijing
China
8610-6251-8856 (Phone)

HOME PAGE: http://rbs.org.cn

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