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

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  • 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.

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

    Citation:

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  • Figure 1.  Market Adjusted Average CAR of Different Groups

    Table 1.  Cumulative Abnormal Returns of Different Groups

    Windows(1)(2)(1)-(2)
    aroundFullInstitutionalInstitutional
    SEOsSampleOwnershipOwnership
    (month)IncreasedDecreased
    Average Return3.887***3.598***4.376***-0.778
    (-36, 0)T value14.61210.9819.704-1.417
    P value0.0000.0000.0000.158
    Average Return4.452***4.274***4.754***-0.480
    (-24, 0)T value17.02712.39012.070-0.887
    P value0.0000.0000.0000.376
    Average Return0.869***0.940***0.748***0.192
    (-6, 0)T value12.0319.2298.3851.416
    P value0.0000.0000.0000.158
    Average Return0.105***0.161***0.0100.151***
    (0, 1)T value4.4845.3140.2853.182
    P value0.0000.0000.7770.002
    Average Return0.155***0.238***0.0140.223***
    (0, 3)T value4.5615.3560.2883.250
    P value0.0000.0000.7740.001
    Average Return0.229***0.415***-0.0870.502***
    (0, 6)T value3.8695.069-1.3154.765
    P value0.0000.0000.1920.000
    Average Return0.252***0.485***-0.141*0.626***
    (0, 9)T value3.4514.668-1.9594.951
    P value0.0010.0000.0530.000
    Average Return0.197**0.437***-0.209***0.646***
    (0, 12)T value2.4573.784-2.7724.684
    P value0.0150.0000.0070.000
    Average Return0.1100.237**-0.1060.344**
    (0, 18)T value1.5702.528-1.0972.546
    P value0.1180.0130.2760.012
    Average Return0.0730.113**0.0050.108
    (0, 24)T value1.6232.4090.0551.054
    P value0.1060.0170.9570.294
    Note: $*, ** and ***$ indicate significance at $10\%$, $5\%$, and $1\% $levels, respectively.
     | Show Table
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    Table 2.  Institutional Ownership Change after SEOs and Stock Performance

    dependentCARCARCARCARCARCARCAR
    variable(0, 1)(0, 3)(0, 6)(0, 9)(0, 12)(0, 18)(0, 24)
    Increased0.071*0.067*0.143*0.119***0.123**0.0350.024
    (1.774)(1.256)(1.761)(2.379)(2.982)(0.345)(0.279)
    Private Offering0.105*0.0690.192*0.1290.0570.2050.197*
    (1.953)(0.975)(1.778)(1.120)(0.433)(1.545)(1.702)
    Controls
    Observations245245245245245245245
    R-square0.0740.0650.0900.0600.0210.0450.078
     | Show Table
    DownLoad: CSV
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