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April 2018, 14(2): 647-652. doi: 10.3934/jimo.2017066

A study on institutional investors selecting better stocks: Evidence from SEOs in China

1. 

School of Economics, Peking University, Beijing 100871, China

2. 

School of Economic Mathematics, Southwestern University of Finance and Economics, Chengdu 611130, China

 

The reviewing process was handled by Changjun Yu

Received  December 2015 Revised  August 2016 Published  June 2017

Using the data of stock returns and the variations of quarterly institutional ownership around Secondary Equity Offerings (SEOs) in China from 2004 to 2008, we verify that institutional investors are smart in selecting stocks. Sorting the SEOs samples into two groups according to whether there is an increase or decrease in institutional ownership, we find no significant difference in stock returns between the two groups before SEOs, but higher returns among the group with increases in institutional ownership over 1 month, 3 month, 6 month, 9 month, 12 month and 18 month periods, respectively. This result indicates the evidence of the stronger stock selection ability of institutional investors.

Citation: Rui Li, Shaoyong Lai. A study on institutional investors selecting better stocks: Evidence from SEOs in China. Journal of Industrial & Management Optimization, 2018, 14 (2) : 647-652. doi: 10.3934/jimo.2017066
References:
[1]

P. Beissner, Equilibrium princes and trade under ambiguous volatility, Economic Theory, 61 (2016), 1-26. doi: 10.1007/s00199-016-0979-y.

[2]

R. BoucekkineC. Camacho and G. Fabbri, Spatial dynamics and convergence: The spatial AK model, Journal of Economic Theory, 148 (2013), 2719-2736. doi: 10.1016/j.jet.2013.09.013.

[3]

S. J. Brown and J. B. Warner, Using daily stock returns: The case of event studies, Journal of Financial Economics, 14 (1985), 3-31. doi: 10.1016/0304-405X(85)90042-X.

[4]

K. Chen and X. C. Dong, Double long-term underperformance in Chinese stock market SEO stock returns and the performance of the company's performance, Commercial Research, 2 (2006), 160-164.

[5]

S. GibsonA. Safieddine and R. Sonti, Smart investments by smart money: Evidence from seasoned equity offerings, Journal of Financial Economics, 72 (2004), 581-604. doi: 10.1016/j.jfineco.2003.05.001.

[6]

J. V. D. HartaS. Erica and V. D. Dick, Stock selection strategies in emerging markets, Journal of Empirical Finance, 10 (2003), 105-132. doi: 10.1016/S0927-5398(02)00022-1.

[7]

T. Loughran and J. R. Ritter, The new issues puzzle, Journal of Finance, 50 (1995), 23-51. doi: 10.1111/j.1540-6261.1995.tb05166.x.

[8]

H. MichaelS. L. James and M. B. Wintoki, Institutional Investors and the Long-Run Performance of Private Placements, Financial Management Association Meetings, 10 (2006), 1-27.

[9]

S. L. Tang and Y. M. Hu, Institutional Investors' Selecting Stock Ability and Information Transparency of Listed Company -An Evidence from Shenzhen Stock Exchange, PhD dissertation, Shanghai Jiao Tong University, (2009).

[10]

C. J. ThomasS. He and G. Hu, The role of institutional investors in seasoned equity offerings, Journal of Financial Economics, 94 (2009), 384-411. doi: 10.1016/j.jfineco.2008.12.011.

show all references

References:
[1]

P. Beissner, Equilibrium princes and trade under ambiguous volatility, Economic Theory, 61 (2016), 1-26. doi: 10.1007/s00199-016-0979-y.

[2]

R. BoucekkineC. Camacho and G. Fabbri, Spatial dynamics and convergence: The spatial AK model, Journal of Economic Theory, 148 (2013), 2719-2736. doi: 10.1016/j.jet.2013.09.013.

[3]

S. J. Brown and J. B. Warner, Using daily stock returns: The case of event studies, Journal of Financial Economics, 14 (1985), 3-31. doi: 10.1016/0304-405X(85)90042-X.

[4]

K. Chen and X. C. Dong, Double long-term underperformance in Chinese stock market SEO stock returns and the performance of the company's performance, Commercial Research, 2 (2006), 160-164.

[5]

S. GibsonA. Safieddine and R. Sonti, Smart investments by smart money: Evidence from seasoned equity offerings, Journal of Financial Economics, 72 (2004), 581-604. doi: 10.1016/j.jfineco.2003.05.001.

[6]

J. V. D. HartaS. Erica and V. D. Dick, Stock selection strategies in emerging markets, Journal of Empirical Finance, 10 (2003), 105-132. doi: 10.1016/S0927-5398(02)00022-1.

[7]

T. Loughran and J. R. Ritter, The new issues puzzle, Journal of Finance, 50 (1995), 23-51. doi: 10.1111/j.1540-6261.1995.tb05166.x.

[8]

H. MichaelS. L. James and M. B. Wintoki, Institutional Investors and the Long-Run Performance of Private Placements, Financial Management Association Meetings, 10 (2006), 1-27.

[9]

S. L. Tang and Y. M. Hu, Institutional Investors' Selecting Stock Ability and Information Transparency of Listed Company -An Evidence from Shenzhen Stock Exchange, PhD dissertation, Shanghai Jiao Tong University, (2009).

[10]

C. J. ThomasS. He and G. Hu, The role of institutional investors in seasoned equity offerings, Journal of Financial Economics, 94 (2009), 384-411. doi: 10.1016/j.jfineco.2008.12.011.

Figure 1.  Market Adjusted Average CAR of Different Groups
Table 1.  Cumulative Abnormal Returns of Different Groups
Windows(1)(2)(1)-(2)
aroundFullInstitutionalInstitutional
SEOsSampleOwnershipOwnership
(month)IncreasedDecreased
Average Return3.887***3.598***4.376***-0.778
(-36, 0)T value14.61210.9819.704-1.417
P value0.0000.0000.0000.158
Average Return4.452***4.274***4.754***-0.480
(-24, 0)T value17.02712.39012.070-0.887
P value0.0000.0000.0000.376
Average Return0.869***0.940***0.748***0.192
(-6, 0)T value12.0319.2298.3851.416
P value0.0000.0000.0000.158
Average Return0.105***0.161***0.0100.151***
(0, 1)T value4.4845.3140.2853.182
P value0.0000.0000.7770.002
Average Return0.155***0.238***0.0140.223***
(0, 3)T value4.5615.3560.2883.250
P value0.0000.0000.7740.001
Average Return0.229***0.415***-0.0870.502***
(0, 6)T value3.8695.069-1.3154.765
P value0.0000.0000.1920.000
Average Return0.252***0.485***-0.141*0.626***
(0, 9)T value3.4514.668-1.9594.951
P value0.0010.0000.0530.000
Average Return0.197**0.437***-0.209***0.646***
(0, 12)T value2.4573.784-2.7724.684
P value0.0150.0000.0070.000
Average Return0.1100.237**-0.1060.344**
(0, 18)T value1.5702.528-1.0972.546
P value0.1180.0130.2760.012
Average Return0.0730.113**0.0050.108
(0, 24)T value1.6232.4090.0551.054
P value0.1060.0170.9570.294
Note: $*, ** and ***$ indicate significance at $10\%$, $5\%$, and $1\% $levels, respectively.
Windows(1)(2)(1)-(2)
aroundFullInstitutionalInstitutional
SEOsSampleOwnershipOwnership
(month)IncreasedDecreased
Average Return3.887***3.598***4.376***-0.778
(-36, 0)T value14.61210.9819.704-1.417
P value0.0000.0000.0000.158
Average Return4.452***4.274***4.754***-0.480
(-24, 0)T value17.02712.39012.070-0.887
P value0.0000.0000.0000.376
Average Return0.869***0.940***0.748***0.192
(-6, 0)T value12.0319.2298.3851.416
P value0.0000.0000.0000.158
Average Return0.105***0.161***0.0100.151***
(0, 1)T value4.4845.3140.2853.182
P value0.0000.0000.7770.002
Average Return0.155***0.238***0.0140.223***
(0, 3)T value4.5615.3560.2883.250
P value0.0000.0000.7740.001
Average Return0.229***0.415***-0.0870.502***
(0, 6)T value3.8695.069-1.3154.765
P value0.0000.0000.1920.000
Average Return0.252***0.485***-0.141*0.626***
(0, 9)T value3.4514.668-1.9594.951
P value0.0010.0000.0530.000
Average Return0.197**0.437***-0.209***0.646***
(0, 12)T value2.4573.784-2.7724.684
P value0.0150.0000.0070.000
Average Return0.1100.237**-0.1060.344**
(0, 18)T value1.5702.528-1.0972.546
P value0.1180.0130.2760.012
Average Return0.0730.113**0.0050.108
(0, 24)T value1.6232.4090.0551.054
P value0.1060.0170.9570.294
Note: $*, ** and ***$ indicate significance at $10\%$, $5\%$, and $1\% $levels, respectively.
Table 2.  Institutional Ownership Change after SEOs and Stock Performance
dependentCARCARCARCARCARCARCAR
variable(0, 1)(0, 3)(0, 6)(0, 9)(0, 12)(0, 18)(0, 24)
Increased0.071*0.067*0.143*0.119***0.123**0.0350.024
(1.774)(1.256)(1.761)(2.379)(2.982)(0.345)(0.279)
Private Offering0.105*0.0690.192*0.1290.0570.2050.197*
(1.953)(0.975)(1.778)(1.120)(0.433)(1.545)(1.702)
Controls
Observations245245245245245245245
R-square0.0740.0650.0900.0600.0210.0450.078
dependentCARCARCARCARCARCARCAR
variable(0, 1)(0, 3)(0, 6)(0, 9)(0, 12)(0, 18)(0, 24)
Increased0.071*0.067*0.143*0.119***0.123**0.0350.024
(1.774)(1.256)(1.761)(2.379)(2.982)(0.345)(0.279)
Private Offering0.105*0.0690.192*0.1290.0570.2050.197*
(1.953)(0.975)(1.778)(1.120)(0.433)(1.545)(1.702)
Controls
Observations245245245245245245245
R-square0.0740.0650.0900.0600.0210.0450.078
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