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

Rui Li; Shaoyong Lai

doi:10.3934/jimo.2017066

Article Contents

2018, Volume 14, Issue 2: 647-652. Doi: 10.3934/jimo.2017066

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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

Received: November 30, 2015

Revised: July 31, 2016

Early access: May 2017

Published: March 2018

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Abstract

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.

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

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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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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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