Institutional Investorse Information Advantage,Stock Volatility And Its Influencing Factors

In this paper,We use quarterly data,from March 2006 to September 2016,of 480 non-financial companies listed on China's Shanghai and Shenzhen A-share market(a total of 20160 observations)for the sample.By adopting Y.Campbell(1991)[1],s unexpected stock return decomposition model,we applied the method introduced by Vuolteenaho(2002)[2]to our sample,which breaks unexpected stock returns down to cash flow news and discount rate news.On this basis,we introduce the proportion of institutional holdings into the unanticipated stock return decomposition model to test the relationship between institutional investors' shareholding,cash flow news and discount rate news.Since existing literature shows that institutional investors have an information advantage in stock market,we relate institutional holdings to cash flow news and discount rate news in this paper,and then test whether the information advantage of institutional investors is from the company's future profitability(ie cash flow information advantage),or from the company's future system risk(That is,discount rate information advantage).The former indicates that the institution can obtain a risk-adjusted excess rate of return,while the latter indicates the risk income obtained by the institution.This method of inspection depends only on the valuation model,but not with the specific risk pricing model,so we are understanding the institutions'investment behavior from a new perspective.Based on empirical research results,We draw the following conclusion:(1)In China's A-share market,institutional investors have obvious information advantage,which is specifically related to the fundamentals of listed firms.(2)In China' s A-share market,the variance of expected future cash flows and the variance of expected future return are negatively related with the shareholding ratio of institutions.This is the result of institutional investors' timing cash flow news or expected return news and conducting conservative trading strategy with their own information advantage.(3)The negative correlation between institutional shareholding proportion and either the variance of expected future cashflow or the variance of expected future return decreases with the ratio of institutional shareholding going up.When the shareholding ratio of the institutions reaches a certain level,the volatility of the future cash flow expectation becomes stable,indicating that there are two kinds of cash flow news,systematic cash flow news and non-systematic one.The stock return variance brought by systematic cash flow news decreases when institutional shareholdings goes up,while the stock return variance brought by non-systematic cash flow information is not significantly correlated with institutional shareholding.(4)Non-systematic cash flow information constitutes an important part of the excess returns for institutional investors,but this non-systematic cash flow information advantage can easily be diversified when institutional shareholding increases;(5)after decomposing stock return,the leading role of cash flow news is first weakened and then strengthened by institutional shareholding ratio.This is because the accumulation of cash flow information advantage is only possible when the proportion of institutional holdings reach a certain level.And only if the potential additional benefit of information superiority is equal to or greater than the potential transaction cost,it will trigger institutional investors' response to cash flow news.(6)In the case of variance decomposition of excess returns,the dominant impact of cash flow news on excess returns is significantly negatively correlated with the proportion of institutional holdings.This means the increase in the proportion of institutional holdings does not increase the relative contribution of cash flow to excess returns,in other words,cash flow information superiority did not bring excess return for institutional investors.(7)In China's A-share market,the discount rate is likely accompanied by a weakening leading role of cash flow news to stock returns.