Common Institutional Investors and Stock Market Pricing Efficiency

Chen Zuohua; Lyu Fengjun

doi:doi:10.16538/j.cnki.jsufe.2024.02.003

Summary

The improvement of stock market pricing efficiency is important for promoting the function of the capital market and maintaining the smooth operation of the market. As the deepening reform of China’s capital market continues to advance, common institutional investors holding shares in many companies in the same industry have gradually entered the public’s field of vision, and the economic consequences of their shareholding are worth paying attention to. However, in view of the advantageous characteristics of common institutional investors and the specificity of their investment objectives, it is still controversial whether they can improve the pricing efficiency of the stock market and whether they have a positive effect on the capital market. Taking China’s A-share listed companies in Shanghai and Shenzhen as the sample, this paper explores the impact of common institutional investors on stock market pricing efficiency. The results show that common institutional investors significantly reduce stock market pricing efficiency, supporting the collusion effect hypothesis. Mechanism testing finds that common institutional investors reduce stock market pricing efficiency by creating information barriers through lowering the disclosure quality and efficiency of information, and exacerbating the agency problem through colluding with the management. Further analysis finds that transactional and business-dependent common institutional investors are more prone to collusive behavior, while stricter industry regulation, greater media pressure, higher independence of independent directors, as well as higher levels of investor protection and market competition can play the role of good internal and external supervision and governance, which effectively inhibit the negative impact of common institutional investors on stock market pricing efficiency. This paper not only enriches the research on the economic consequences of common institutional investors on the capital market, but also provides references on how to improve the functioning of the capital market by examining in depth the mitigation mechanism of the collusion effect of common institutional investors.