The Impact Of Institutional Trading On Stock Return Synchronicity

Stock return synchronicity, measures to what extent the individual stock returns would comove with market returns. According to efficient market theory, an individual firm’s stock price reflects market-level, industry-level, and firm-specific information. If stock price reflects more market-level and industry-level information, stock return synchronicity is higher, that is, informativeness of stock prices is lower. In two cross-country studies of Morck Yeung and Yu (2000,2013), a prominent phenomenon is that China has the very high stock return synchronicity:the Chinese stock return synchronicity is ranked as the second high across forty sample countries in the first study; while in the second paper with 45 sample, China has the highest stock return synchronicity.Higher stock return synchronicity not only means low efficiency of information, it also affects the efficiency of capital allocation, corporate governance and the stable of the capital market. For Chinese stock market, which has a relatively high synchronicity, it’s particularly important to explore the way to reduce stock return synchronicity. Focus on Chinese securities market, which is an emerging market dominated by individual investors, this paper investigates the impact of institutional trading on stock return synchronicity from the information impounding perspective. Concrete research contents and results are as follows:First, since 2004, according to CSRC, investment funds are required to report the big change of their investment portfolio in the annual and semi-annual financial statements. Using the hand-collected data from funds’ annual financial statements, we construct more precise measurement of institutional trading and investigate the impact of institutional trading on stock return synchronicity. The results show that institutional trading can incorporate firm-specific information into stock price and lower the stock return synchronicity. Because of the strong capital resource and information advantage of institutional investors, a single transaction is usually large. In robustness tests, this paper also measure institutional trading with block trades, and the results remain consistent.Second, previous studies about block trading and institutional trading state that there is an asymmetry between price impact of sell-side and buy-side trading. Based on our new measurement of institutional trading, which can separate sell-side trading from buy-side trading, this paper examine the asymmetric impacts of buy-side and sell-side institutional trading on stock return synchronicity in Chinese security market. The results show: compared with the sell-side institutional trading, buy-side trading can incorporate more firm-specific information into the stock price and lower the stock return synchronicity.Third, this paper also examines the trading impact on stock return synchronicity from different types of institutional investors. After classifying mutual funds into passive and active funds based on their activeness of portfolio management, into short-and long-funds based on their portfolio turnover, I construct trading measurements of different types of mutual funds. Empirical results show that mutual funds differ in their ability to affect stock return synchronicity, for instance, trading of active funds have a greater effect on synchronicity than passive funds, trading of short-term funds have a greater effect on synchronicity than long-term funds.Fourth, corporate information transparency can affect the cost of information collection, further influence private information collection of investors. Therefore, this paper investigates the effect of information transparency on relationship between institutional trading and stock return synchronicity. The results demonstrate that improvement of corporate information transparency will stimulate institutional investors to collect private information, and the marginal effect of institutional trading on stock return synchronicity will increase.Finally, in order to verify the reliability of my conclusions, this paper conducts seven robustness tests, including endogeneity test, eliminating observations without fund trade, different classification of investment funds, dividing the sample into three groups based on firm size, controlling for market circumstance, Fama-Macbeth regression, measuring institutional trades with block trades. The conclusions are robust, while market circumstance will affect the asymmetric impacts of buy-side and sell-side institutional trading on stock return synchronicity:when the market is bull, only the sell-side trading can lower the stock return synchronicity; when the market is bear, only the buy-side trading can lower the stock return synchronicity.