Institutional Investors,Information Transparency And Stock Volatility

Different from existing research results examining direct effects of institutional investors on stock volatility through investment strategy and trading,this paper examines indirect effects of institutional investors on stock volatility from perspective of firms' information transparency.The sample data of institutional ownership for A-share stocks is from 2006 to 2017.We use analyst coverage and analysts' earnings forecast to proxy information transparency.Applying two-step regression,we examine the effects of institutional ownership on information transparency and the effects of information transparency on stock volatility.We find that higher institutional ownership is associated with greater analyst coverage,lower forecast dispersion,and lower forecast error,which results in lower stock volatility.And we also find that the coefficient of institutional ownership on stock volatility drops significantly after information transparency added,indicating that except affecting stock volatility through trading,institutional investors can help stabilize stock prices through increasing firms' information transparency.Considering institutional investors' heterogeneity,we find that active investors such as mutual funds play a greater role.The result is robust to alternative proxies,subsamples and controlling for endogeneity.The contribution of this article is that we find institutional investors can help monitor the listed companies,improve information environment,increase information transparency and stabilize stock prices,although some of them are considered as short-term speculators in A-share stock market.This finding has significant meaning to help stabilize stock markets.It also provides useful evidences for regulators in their guidance of institutional investors to monitor listed companies and stabilize stock prices.