Institutional Investors and Equity Prices: Information, Behavioral Bias, and Arbitrage

54 Pages Posted: 6 Mar 2017

See all articles by Bing Han

Bing Han

University of Toronto, Rotman School of Management

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology; School of Finance, Zhongnan University of Economics and Law

Date Written: March 1, 2017

Abstract

This paper investigates how institutional investors matter for asset pricing by using daily institutional trading data and a natural experiment, the split–share structure reform in China. This reform required all listed companies to convert their non-tradable shares to tradable shares after paying a negotiated compensation. We find that: 1). Only passive institutions are privy to company-specific details: they buy (avoid) shares of companies that end up with high (low) compensation ratios on announcement day T0. 2). Trading halts after T0. On the first subsequent trading day T1, both passive domestic institutions and individuals are prone to the disposition effect: they sell a large and abnormal amount of shares in the reform companies with high unrealized gains accumulated during the non-trading period, and 3). The selling pressure drives stock prices significantly below fair values. Both active and foreign institutions take advantage of the stock undervaluation and earn significant abnormal return, which eliminate stock mispricing.

Keywords: Institutional/Individual Investors, Chinese stock market, Split–share Reform, Disposition Effect, Arbitrage

JEL Classification: G11, G12, G14, G15

Suggested Citation

Han, Bing and Kong, Dongmin, Institutional Investors and Equity Prices: Information, Behavioral Bias, and Arbitrage (March 1, 2017). Rotman School of Management Working Paper No. 2926401, Available at SSRN: https://ssrn.com/abstract=2926401 or http://dx.doi.org/10.2139/ssrn.2926401

Bing Han

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Dongmin Kong (Contact Author)

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

School of Finance, Zhongnan University of Economics and Law ( email )

Wuhan, Hubei 430073
China

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