Capital Market Consequence of Institutional Investment Constraint: Evidence from the Stock Price Crash Risk in China

ABSTRACT

This study finds that institutional investment constraint increases stock price crash risk. We employ both instrumental variable approach and a quasi-experiment to identify the causal effect. We also find institutions are more likely to sell stocks with stronger institutional investment constraint in response to firm’s bad news. In addition, the positive relationship between institutional investment constraint and crash risk is less pronounced for institutions of larger size and better past performance. These results are consistent with managerial catering explanation rather than career concern and soft information explanations. Finally, the channel analysis shows that the effect of institutional investment constraint on crash risk is mediated by predatory selling and investor information competition.

KEYWORDS:

• Institutional investment constraints
• crash risk
• predatory trading
• investor information competition

JEL CLASSIFICATION:

• G20
• G32

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 According to Cao, Han, and Wang (2017), the increasing of institutional investment constraints means more severe institutional overweight, which equals to higher (lower) institutional buy (sell) constraints. Thus, institutional buy constraint and institutional sell constraint are like two side of a coin. In the following, for the sake of simplicity, we refer to institutional investment constraint as institutional buy constraint.

2 Habib, Hasan, and Jiang (2018) provide an excellent survey on crash risk.

3 SSSR starts in 2005-5-9. Our sample includes 2005 because the variables of crash risk lag for one year in our empirical model. In Section 4.2, we show that empirical results are still robust for sub-samples after 2005.

4 Stock holdings of other institutional investor are disclosed only if it is in the top 10 (tradable) shareholders list. Thus, their stock holdings cannot be fully observed.

5 Stock holdings of institutional investors are only fully discovered for mutual fund at a semi-annual frequency in the A-shares market.

6 Industry classification is per the guideline by the Guidance on Industry Categories of Listed Companies (2012) issued by CSRC.

7 Chen et al. (2018) use the past-three year moving sum of ABACC to proxy for accounting properties, and also find similar results.

8 The F-Statistics for the first stage regression is 15.3683 and significant at 1% level, ruling out the issue of weak instrument.

9 The corresponding P-value for the model of Column (1)–(3) in Table 4 is 0.28, 0.39 and 0.45. The insignificance suggests the instruments are exogenous.

10 The extremely high groups could relate to informed-dedicated institutions in the A-shares market. Due to the legal imperfection in the A-shares market, the informed-dedicated institutions conspire with management of listed company to make profits (Jiang and Kim 2015; Lin et al. 2019; Fan and Fu 2020). Thus, they are more ‘friendly’ with management and less prone to exit.

11 At the end of each fiscal year, large (small) institutions are defined as funds above (below) 70th (30th) percentile of the funds size.

12 At the end of each fiscal year, good (bad) institutions are defined as funds above (below) 70th (30th) percentile of their performance during the fiscal year.

Additional information

Funding

This work was supported by the National Office for Philosophy and Social Sciences [grant number 18CGL010].