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

Rui Li; Shaoyong Lai

doi:10.3934/jimo.2017066

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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

Rui Li ^1, and Shaoyong Lai ^2,,

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.

Keywords: Secondary Equity Offerings (SEOs), institutional ownership, stock selection.

Mathematics Subject Classification: Primary: 91B26; Secondary: 91G70.

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. Google Scholar
[2]	R. Boucekkine, C. 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. Google Scholar
[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. Google Scholar
[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. Google Scholar
[5]	S. Gibson, A. 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. Google Scholar
[6]	J. V. D. Harta, S. 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. Google Scholar
[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. Google Scholar
[8]	H. Michael, S. L. James and M. B. Wintoki, Institutional Investors and the Long-Run Performance of Private Placements, Financial Management Association Meetings, 10 (2006), 1-27. Google Scholar
[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). Google Scholar
[10]	C. J. Thomas, S. 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. Google Scholar

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References:

[1]	P. Beissner, Equilibrium princes and trade under ambiguous volatility, Economic Theory, 61 (2016), 1-26. doi: 10.1007/s00199-016-0979-y. Google Scholar
[2]	R. Boucekkine, C. 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. Google Scholar
[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. Google Scholar
[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. Google Scholar
[5]	S. Gibson, A. 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. Google Scholar
[6]	J. V. D. Harta, S. 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. Google Scholar
[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. Google Scholar
[8]	H. Michael, S. L. James and M. B. Wintoki, Institutional Investors and the Long-Run Performance of Private Placements, Financial Management Association Meetings, 10 (2006), 1-27. Google Scholar
[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). Google Scholar
[10]	C. J. Thomas, S. 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. Google Scholar

Figure 1. Market Adjusted Average CAR of Different Groups

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Table 1. Cumulative Abnormal Returns of Different Groups

Windows			(1)	(2)	(1)-(2)
around		Full	Institutional	Institutional
SEOs		Sample	Ownership	Ownership
(month)			Increased	Decreased
	Average Return	3.887^***	3.598^***	4.376^***	-0.778
(-36, 0)	T value	14.612	10.981	9.704	-1.417
	P value	0.000	0.000	0.000	0.158
	Average Return	4.452^***	4.274^***	4.754^***	-0.480
(-24, 0)	T value	17.027	12.390	12.070	-0.887
	P value	0.000	0.000	0.000	0.376
	Average Return	0.869^***	0.940^***	0.748^***	0.192
(-6, 0)	T value	12.031	9.229	8.385	1.416
	P value	0.000	0.000	0.000	0.158
	Average Return	0.105^***	0.161^***	0.010	0.151^***
(0, 1)	T value	4.484	5.314	0.285	3.182
	P value	0.000	0.000	0.777	0.002
	Average Return	0.155^***	0.238^***	0.014	0.223^***
(0, 3)	T value	4.561	5.356	0.288	3.250
	P value	0.000	0.000	0.774	0.001
	Average Return	0.229^***	0.415^***	-0.087	0.502^***
(0, 6)	T value	3.869	5.069	-1.315	4.765
	P value	0.000	0.000	0.192	0.000
	Average Return	0.252^***	0.485^***	-0.141^*	0.626^***
(0, 9)	T value	3.451	4.668	-1.959	4.951
	P value	0.001	0.000	0.053	0.000
	Average Return	0.197^**	0.437^***	-0.209^***	0.646^***
(0, 12)	T value	2.457	3.784	-2.772	4.684
	P value	0.015	0.000	0.007	0.000
	Average Return	0.110	0.237^**	-0.106	0.344^**
(0, 18)	T value	1.570	2.528	-1.097	2.546
	P value	0.118	0.013	0.276	0.012
	Average Return	0.073	0.113^**	0.005	0.108
(0, 24)	T value	1.623	2.409	0.055	1.054
	P value	0.106	0.017	0.957	0.294
Note: $, * and ***$ indicate significance at $10\%$, $5\%$, and $1\% $levels, respectively.

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Windows			(1)	(2)	(1)-(2)
around		Full	Institutional	Institutional
SEOs		Sample	Ownership	Ownership
(month)			Increased	Decreased
	Average Return	3.887^***	3.598^***	4.376^***	-0.778
(-36, 0)	T value	14.612	10.981	9.704	-1.417
	P value	0.000	0.000	0.000	0.158
	Average Return	4.452^***	4.274^***	4.754^***	-0.480
(-24, 0)	T value	17.027	12.390	12.070	-0.887
	P value	0.000	0.000	0.000	0.376
	Average Return	0.869^***	0.940^***	0.748^***	0.192
(-6, 0)	T value	12.031	9.229	8.385	1.416
	P value	0.000	0.000	0.000	0.158
	Average Return	0.105^***	0.161^***	0.010	0.151^***
(0, 1)	T value	4.484	5.314	0.285	3.182
	P value	0.000	0.000	0.777	0.002
	Average Return	0.155^***	0.238^***	0.014	0.223^***
(0, 3)	T value	4.561	5.356	0.288	3.250
	P value	0.000	0.000	0.774	0.001
	Average Return	0.229^***	0.415^***	-0.087	0.502^***
(0, 6)	T value	3.869	5.069	-1.315	4.765
	P value	0.000	0.000	0.192	0.000
	Average Return	0.252^***	0.485^***	-0.141^*	0.626^***
(0, 9)	T value	3.451	4.668	-1.959	4.951
	P value	0.001	0.000	0.053	0.000
	Average Return	0.197^**	0.437^***	-0.209^***	0.646^***
(0, 12)	T value	2.457	3.784	-2.772	4.684
	P value	0.015	0.000	0.007	0.000
	Average Return	0.110	0.237^**	-0.106	0.344^**
(0, 18)	T value	1.570	2.528	-1.097	2.546
	P value	0.118	0.013	0.276	0.012
	Average Return	0.073	0.113^**	0.005	0.108
(0, 24)	T value	1.623	2.409	0.055	1.054
	P value	0.106	0.017	0.957	0.294
Note: $, * and ***$ indicate significance at $10\%$, $5\%$, and $1\% $levels, respectively.

Table 2. Institutional Ownership Change after SEOs and Stock Performance

dependent	CAR	CAR	CAR	CAR	CAR	CAR	CAR
variable	(0, 1)	(0, 3)	(0, 6)	(0, 9)	(0, 12)	(0, 18)	(0, 24)
Increased	0.071^*	0.067^*	0.143^*	0.119^***	0.123^**	0.035	0.024
	(1.774)	(1.256)	(1.761)	(2.379)	(2.982)	(0.345)	(0.279)
Private Offering	0.105^*	0.069	0.192^*	0.129	0.057	0.205	0.197^*
	(1.953)	(0.975)	(1.778)	(1.120)	(0.433)	(1.545)	(1.702)
Controls	√	√	√	√	√	√	√
Observations	245	245	245	245	245	245	245
R-square	0.074	0.065	0.090	0.060	0.021	0.045	0.078

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dependent	CAR	CAR	CAR	CAR	CAR	CAR	CAR
variable	(0, 1)	(0, 3)	(0, 6)	(0, 9)	(0, 12)	(0, 18)	(0, 24)
Increased	0.071^*	0.067^*	0.143^*	0.119^***	0.123^**	0.035	0.024
	(1.774)	(1.256)	(1.761)	(2.379)	(2.982)	(0.345)	(0.279)
Private Offering	0.105^*	0.069	0.192^*	0.129	0.057	0.205	0.197^*
	(1.953)	(0.975)	(1.778)	(1.120)	(0.433)	(1.545)	(1.702)
Controls	√	√	√	√	√	√	√
Observations	245	245	245	245	245	245	245
R-square	0.074	0.065	0.090	0.060	0.021	0.045	0.078

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

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