IDEAS home Printed from https://ideas.repec.org/a/eee/pacfin/v67y2021ics0927538x21000457.html
   My bibliography  Save this article

A new estimation of institutional informed trading and firm transparency: Evidence from China

Author

Listed:
  • Gu, Xin
  • Ying, Shan
  • Wang, Liangliang
  • Yu, Zhen
  • Sharma, Susan Sunila

Abstract

We examine the performance of a relatively new measure of institutional informed trading, namely the percentage change in the number of a stock's institutional investors using data from the Chinese stock market. We then introduce corporate transparency to quantify how informed trading drives financial market uncertainty. Our results suggest that the motivation behind institutions entering and exiting a stock relies on their superior information advantage, which gives institutions greater power to forecast future stock returns. Furthermore, the significant correlation between informed trading and future stock performance tends to weaken after introducing corporate transparency. Informed institutions prefer to hold stocks of opaque corporations, thereby worsening information asymmetry and inducing more uncertainty in the market.

Suggested Citation

  • Gu, Xin & Ying, Shan & Wang, Liangliang & Yu, Zhen & Sharma, Susan Sunila, 2021. "A new estimation of institutional informed trading and firm transparency: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:pacfin:v:67:y:2021:i:c:s0927538x21000457
    DOI: 10.1016/j.pacfin.2021.101538
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927538X21000457
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.pacfin.2021.101538?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Paul A. Gompers & Andrew Metrick, 2001. "Institutional Investors and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 229-259.
    2. Xuemin (Sterling) Yan & Zhe Zhang, 2009. "Institutional Investors and Equity Returns: Are Short-term Institutions Better Informed?," The Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 893-924, February.
    3. Nerissa C. Brown & Kelsey D. Wei & Russ Wermers, 2014. "Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices," Management Science, INFORMS, vol. 60(1), pages 1-20, January.
    4. Kling, Gerhard & Gao, Lei, 2008. "Chinese institutional investors' sentiment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(4), pages 374-387, October.
    5. Dedman, Elisabeth & Lennox, Clive, 2009. "Perceived competition, profitability and the withholding of information about sales and the cost of sales," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 210-230, December.
    6. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 171-205.
    7. Bipin Ajinkya & Sanjeev Bhojraj & Partha Sengupta, 2005. "The Association between Outside Directors, Institutional Investors and the Properties of Management Earnings Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 43(3), pages 343-376, June.
    8. Agudelo, Diego A. & Byder, James & Yepes-Henao, Paula, 2019. "Performance and informed trading. Comparing foreigners, institutions and individuals in an emerging stock market," Journal of International Money and Finance, Elsevier, vol. 90(C), pages 187-203.
    9. Feng, Xunan & Johansson, Anders C. & Zhang, Tianyu, 2015. "Mixing business with politics: Political participation by entrepreneurs in China," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 220-235.
    10. James Jiambalvo & Shivaram Rajgopal & Mohan Venkatachalam, 2002. "Institutional Ownership and the Extent to which Stock Prices Reflect Future Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 19(1), pages 117-145, March.
    11. Re‐Jin Guo & Baruch Lev & Nan Zhou, 2004. "Competitive Costs of Disclosure by Biotech IPOs," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 319-355, May.
    12. Edelen, Roger M. & Ince, Ozgur S. & Kadlec, Gregory B., 2016. "Institutional investors and stock return anomalies," Journal of Financial Economics, Elsevier, vol. 119(3), pages 472-488.
    13. Chang, Chun & Chen, Xin & Liao, Guanmin, 2014. "What are the reliably important determinants of capital structure in china?," Pacific-Basin Finance Journal, Elsevier, vol. 30(C), pages 87-113.
    14. Sonja Olhoft Rego, 2003. "Tax†Avoidance Activities of U.S. Multinational Corporations," Contemporary Accounting Research, John Wiley & Sons, vol. 20(4), pages 805-833, December.
    15. Bin Ke & Kathy Petroni, 2004. "How Informed Are Actively Trading Institutional Investors? Evidence from Their Trading Behavior before a Break in a String of Consecutive Earnings Increases," Journal of Accounting Research, Wiley Blackwell, vol. 42(5), pages 895-927, December.
    16. Bohl, Martin T. & Brzeszczynski, Janusz, 2006. "Do institutional investors destabilize stock prices? evidence from an emerging market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(4), pages 370-383, October.
    17. Guo, Lin & Platikanov, Stefan, 2019. "Institutional ownership and corporate governance of public companies in China," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    18. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    19. Froot, Kenneth A & Scharftstein, David S & Stein, Jeremy C, 1992. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," Journal of Finance, American Finance Association, vol. 47(4), pages 1461-1484, September.
    20. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    21. Manzon, Gil Jr. & Robert Smith, W., 1994. "The effect of the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986 on the distribution of effective tax rates," Journal of Accounting and Public Policy, Elsevier, vol. 13(4), pages 349-362.
    22. Ekkehart Boehmer & Eric K. Kelley, 2009. "Institutional Investors and the Informational Efficiency of Prices," The Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3563-3594, September.
    23. Robert M. Bushman & Joseph D. Piotroski & Abbie J. Smith, 2004. "What Determines Corporate Transparency?," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 207-252, May.
    24. Brian J. Bushee & Theodore H. Goodman, 2007. "Which Institutional Investors Trade Based on Private Information About Earnings and Returns?," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 289-321, May.
    25. Novy-Marx, Robert, 2013. "The other side of value: The gross profitability premium," Journal of Financial Economics, Elsevier, vol. 108(1), pages 1-28.
    26. Hui Guo & Buhui Qiu, 2016. "A Better Measure of Institutional Informed Trading," Contemporary Accounting Research, John Wiley & Sons, vol. 33(2), pages 815-850, June.
    27. Bernard, Vl & Thomas, Jk, 1989. "Post-Earnings-Announcement Drift - Delayed Price Response Or Risk Premium," Journal of Accounting Research, Wiley Blackwell, vol. 27, pages 1-36.
    28. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    29. Diamond, Douglas W, 1985. "Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-1094, September.
    30. Wang, Ashley W. & Zhang, Gaiyan, 2009. "Institutional ownership and credit spreads: An information asymmetry perspective," Journal of Empirical Finance, Elsevier, vol. 16(4), pages 597-612, September.
    31. Maffett, Mark, 2012. "Financial reporting opacity and informed trading by international institutional investors," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 201-220.
    32. Nagar, Venky & Schoenfeld, Jordan & Wellman, Laura, 2019. "The effect of economic policy uncertainty on investor information asymmetry and management disclosures," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 36-57.
    33. Chen, Xia & Harford, Jarrad & Li, Kai, 2007. "Monitoring: Which institutions matter?," Journal of Financial Economics, Elsevier, vol. 86(2), pages 279-305, November.
    34. John R. Graham, 1999. "Herding among Investment Newsletters: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(1), pages 237-268, February.
    35. Richard W. Sias & Laura T. Starks, 2006. "Changes in Institutional Ownership and Stock Returns: Assessment and Methodology," The Journal of Business, University of Chicago Press, vol. 79(6), pages 2869-2910, November.
    36. Kee‐Hong Bae & Jun‐Koo Kang & Jin‐Mo Kim, 2002. "Tunneling or Value Added? Evidence from Mergers by Korean Business Groups," Journal of Finance, American Finance Association, vol. 57(6), pages 2695-2740, December.
    37. Liao, Wenbin & Du, Jianing & Sun, Ping-Wen, 2020. "Heterogeneous institutional preferences and informativeness: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lin, Huiting & Wang, Maolin & Ding, Ning, 2024. "The role of institutional investor cliques in managers' earnings forecasts," International Review of Financial Analysis, Elsevier, vol. 91(C).
    2. Gu, Jing & Shi, Xinyu & Wang, Peini & Xu, Xun, 2022. "Examining the impact of upstream and downstream relationship stability and concentration on firms’ financial performance," Journal of Business Research, Elsevier, vol. 141(C), pages 229-242.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jiao, Yawen & Ye, Pengfei, 2014. "Mutual fund herding in response to hedge fund herding and the impacts on stock prices," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 131-148.
    2. Maffett, Mark, 2012. "Financial reporting opacity and informed trading by international institutional investors," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 201-220.
    3. Anzhela Knyazeva & Diana Knyazeva & Leonard Kostovetsky, 2018. "Investor heterogeneity and trading," European Financial Management, European Financial Management Association, vol. 24(4), pages 680-718, September.
    4. Klein, Olga & Klein, Daniel, 2024. "Institutional consensus after earnings announcements: Information or crowding?," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    5. Jared DeLisle, R. & Morscheck, J.D. & Nofsinger, John R., 2014. "Share repurchases and institutional supply," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 216-230.
    6. Baik, Bok & Kang, Jun-Koo & Kim, Jin-Mo, 2010. "Local institutional investors, information asymmetries, and equity returns," Journal of Financial Economics, Elsevier, vol. 97(1), pages 81-106, July.
    7. Deng, Yongheng & Liu, Xin & Wei, Shang-Jin, 2018. "One fundamental and two taxes: When does a Tobin tax reduce financial price volatility?," Journal of Financial Economics, Elsevier, vol. 130(3), pages 663-692.
    8. Yang, Lisa (Zongfei) & Goh, Jeremy & Chiyachantana, Chiraphol, 2016. "Valuation uncertainty, market sentiment and the informativeness of institutional trades," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 81-98.
    9. Jiang, George & Kenchington, David & McLemore, Ping & Yüksel, H.Zafer, 2024. "Disaggregation quality, stock returns, and institutional demand," Finance Research Letters, Elsevier, vol. 62(PB).
    10. Aragon, George O. & Kim, Min S., 2023. "Fire sale risk and expected stock returns," Journal of Financial Economics, Elsevier, vol. 149(3), pages 578-609.
    11. Angel Zhong, 2022. "Institutional trading in stock market anomalies in Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(1), pages 893-930, March.
    12. Shujun Ding & Chunxin Jia & Zhenyu Wu, 2016. "Mutual Fund Activism and Market Regulation During the Pre-IFRS Period: The Case of Earnings Informativeness in China from an Ethical Perspective," Journal of Business Ethics, Springer, vol. 138(4), pages 765-785, November.
    13. Ramalingegowda, Santhosh & Yu, Yong, 2012. "Institutional ownership and conservatism," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 98-114.
    14. Kim, Donghan & Kim, Hyun-Dong & Joe, Denis Yongmin & Oh, Ji Yeol Jimmy, 2021. "Institutional investor heterogeneity and market price dynamics: Evidence from investment horizon and portfolio concentration," Journal of Financial Markets, Elsevier, vol. 54(C).
    15. Hoang Luong Luong & Huong Giang (Lily) Nguyen & Xiangkang Yin, 2015. "When Is a Firm's Information Asymmetry Priced? The Role of Institutional Investors," International Review of Finance, International Review of Finance Ltd., vol. 15(1), pages 55-88, March.
    16. Aymen Ajina & Faten Lakhal & Danielle Sougné, 2015. "Institutional investors, information asymmetry and stock market liquidity in France," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 11(1), pages 44-59, February.
    17. Aabo, Tom & Lee, Suin & Pantzalis, Christos & Park, Jung Chul, 2020. "Know thy neighbor: Political uncertainty and the informational advantage of local institutional investors," Journal of Banking & Finance, Elsevier, vol. 113(C).
    18. Najah Attig & Sean Cleary & Sadok El Ghoul & Omrane Guedhami, 2013. "Institutional Investment Horizons and the Cost of Equity Capital," Financial Management, Financial Management Association International, vol. 42(2), pages 441-477, June.
    19. Min, Byoung-Kyu & Qiu, Buhui & Roh, Tai-Yong, 2022. "What drives the dispersion anomaly?," Journal of Banking & Finance, Elsevier, vol. 138(C).
    20. Shih-Chuan Tsai, 2014. "Individuals’ Trading Prior to Earnings Announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(9-10), pages 1124-1156, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:67:y:2021:i:c:s0927538x21000457. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/pacfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.