Public Information，Investment Term and Overvaluation

Guo Baiying; Zhou Renyuan

doi:doi:10.16538/j.cnki.jfe.2019.03.007

Summary

Institutional investors have become the dominant force in China’s stock market and play an important role in stabilizing the market and improving its efficiency. There are obvious distinctions in investment objectives, trading strategies and decision-making approach between short-term and long-term institutional investors, so it is necessary to distinguish them when exploring the relationship between institutional investors and the market stability. Positive public information often keeps investors in optimistic mind and leads to overvaluation of stocks. In the absence of short-selling constraints, stock mispricing will not be corrected by the market in time, so that overvaluation becomes obvious and persistent. Institutional investors with different term usually respond differently to the same information, which may lead to different extent of overvaluation. This paper examines whether there is a difference in the extent of overvaluation among the stocks of different investment term. It also examines whether this difference is affected by the overall market quotation, and whether the institutional investors of different term attach different importance to positive public information. The results suggest that, positive public information leads to more serious overvaluation of the stocks favored by short-term institutional investors when the market is short-sale constrained. The stocks with shorter term have higher cumulative returns during the issuance of positive analyst ratings. The difference in the extent of overvaluation among the stocks of different term is significant in the bull market, but no longer significant in the bear market. This may be because institutional investors（both long-term and short-term）are cautiously optimistic about positive public information in the bear market, and as the prices of stocks generally declined, previously excluded " pessimistic” investors can enter the market. Short-term institutional investors are more reliant on public information than long-term institutional investors when they make decisions, which may be seemed as an explanation for the above phenomena. These results show that the short-term behavior of institutional investors aggravates market volatility, which is an important reason for stock price bubbles. Regulatory authorities can identify institutional investors according to investment term and the role of information dissemination. The relationship between short-selling constraints and stock overvaluation has been extensively studied. On this basis, we further explore the relationship between institutional investment term and stock overvaluation. It is always difficult to separate the effect of public information from private information when making an analysis on the impact of market information on institutional investors’ decision-making. We attempt to solve this problem by introducing the social network analysis into the study of institutional investors’ decision-making behavior. We explore the impact of positive public information on institutional investors’ valuation and trading behavior, which advances the research on the relationship between institutional investors’ decision-making behavior and the stability of the capital market, and also provides a reference for institutional investors to formulate relevant strategies.