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Institutionalization and prudence attitude in an imperfect competitive market

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  • Yanjie Wang
  • Yanyi Wang
  • Shunming Zhang
  • Helen Huang

Abstract

Previous research has debated about whether institutionalization could improve market efficiency. We develop a theoretical model under anticipated utility combined with probability weighting to study the impacts of institutionalization on market participation and market efficiency. The prudence attitude towards probability uncertainty leads to limited participation by investors. We find that institutionalization influences the market in two different ways. An increase in the total sector size of institutional investors facilitates price discovery but discourages market participation from naïve investors due to information asymmetry. However, when the top institution has high market power, this large institution trades strategically to induce more participation by naïve traders for risk-sharing at the cost of lowering information efficiency.

Suggested Citation

  • Yanjie Wang & Yanyi Wang & Shunming Zhang & Helen Huang, 2024. "Institutionalization and prudence attitude in an imperfect competitive market," The European Journal of Finance, Taylor & Francis Journals, vol. 30(13), pages 1520-1547, September.
    • Handle: RePEc:taf:eurjfi:v:30:y:2024:i:13:p:1520-1547
    DOI: 10.1080/1351847X.2024.2308634
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