A Comparative Research On The Institutional Preference Of Equity Investment In China A-share Market

Institutional investors have great influence on capital market. Institutional investors have the following attribute when compared with individual investors. At first, they have more professional capability of managing their investment so that they can effectively avoid some irrational behavior. Secondly, institutional investors can fully diversify their portfolio, this can help them reduce idiosyncratic risk. Thirdly, institutional investors are typically in possession of huge amount of funds to lower investment cost per unit. At last, institutional investors can help listed companies to upgrade self-management through participating in their regular operation.Chinese institutional investors appeared around 80s of last century. After rapidly development over last 30 years, they widely increased their holdings of equity investment both in size and proportion. Furthermore, Chinese institutional investors have been developing towards a more pluralistic path.For a long time, the research about institutional investors has been a popular topic for foreign scholars. However, this topic has just recently been paid attention from Chinese researchers due to the late start of Chinese capital market. One of the most important research area about institutional investors is their preference of equity holdings.On the other hand, there is a particular kind of institutional investors which is the qualified foreign institutional investors(QF?) in China. It refers to a system that attracts international investors which must meet certain criterions to invest in its capital market. QF? generally has more experience in investment activities than their Chinese counterparts, so they may show different attributes in equity investment. Hence it is necessary to compare QF?'s equity investment preference with Chinese institutional investors.In this paper, we characterize the ownership dataset by institutional investors in A-share market's companies from 2005 to the second quarter of 2015. The paper focus on equity holdings of institutional investors in aspect of the stock's prudence characteristic, liquidity and historical return. Meanwhile, we research the difference of equity holdings preference between Chinese and foreign institutions. We use an unbalanced panel data set to do our research, and we deal with the data by a multiple linear regression with dummy variables. We use dummy variables to control for time and industry variations.Our paper contains six parts. The first part is a brief introduction about the background of our research. The second part elaborates the development of the institutional investors in China. Part 3 gives a literature review that is related to our research. We explain our research design and propose the hypotheses in Part 4. The fifth part shows the outcome of the empirical research and gives relevant analysis. The last part is a conclusion of the paper.What we conclude are that, first of all, institutions hold more stocks with large size, high proportion of state-owned shares and low book-to-market ratio. Secondly, institutions prefer stock that is listed earlier, is a component of H&S300 index, pays dividends, has lower yield volatility and doesn't listed in foreign markets. This indicates institutions do considerate prudence an important factor of their holdings. Thirdly, institutions prefer stocks that have lower turnover ratios, lower circulation of A shares and lower ownership concentration. This indicates institutions as a whole do not considerate liquidity an important factor of their holdings. Fourthly, we find that institutions as a whole prefer stocks that have lower historical returns. At last, after comparing QF? with Chinese institutional investors, we find that they generally put more importance on the prudence and liquidity of their equity holdings, and prefer stocks with greater past performance in contrast with Chinese counterparts.The innovation of our paper is as followed. Firstly, we did a systematic research on the topic with regard to different dimension, such as prudence, liquidity and historical return of stocks, which is rarely found in previous local research. Secondly, we use the recently established Fama-French 5-factor model when characterize the historical return of a stock.