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Portfolio Distortions Among Institutional Investors: Evidence from China

Author

Listed:
  • Tao Huang
  • Yuancheng Hu
  • Yang Wang
  • Weidong Zhang

Abstract

The behavior of institutional investors often deviates from established personal or social norms; this deviation may reflect either an informational advantage or a psychological bias. In this paper, we investigate the reasons Chinese mutual funds hold lottery-type stocks, which are characterized by low average returns and high risk. We find that funds at the aggregate level do not exhibit a propensity to gamble, but when they do gamble, they earn abnormal returns on lottery-type investments. Gambling-related outperformance is greater among held firms with characteristics that enable fund managers to obtain more informational advantages. Our results suggest that portfolio distortion is driven by the ability of managers to capitalize private information rather than by behavioral bias.

Suggested Citation

  • Tao Huang & Yuancheng Hu & Yang Wang & Weidong Zhang, 2014. "Portfolio Distortions Among Institutional Investors: Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(3), pages 196-220, May.
    • Handle: RePEc:mes:emfitr:v:50:y:2014:i:3:p:196-220
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    Cited by:

    1. Al-Awadhi, Abdullah M., 2019. "Deviation from religious trading norms," Journal of Behavioral and Experimental Finance, Elsevier, vol. 22(C), pages 22-30.

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