Investor Attention, Institutional Ownership, and Stock Return: Empirical Evidence from China

Abstract

Using a search frequency index from Baidu.com as a measure of investor attention, we find that investor attention has a significant and positive effect on the stock return within a week in China’s stock market. This effect is reversed from the second week on, but the transitory positive effect in the beginning cannot be completely offset by the reversal of stock returns within a year. It was further found in this study that a higher fraction of institutional ownership yields weaker transitory effects from investor attention on the stock return the next week and stronger return reversals after a month.

KEY WORDS:

• Baidu’s search volume index
• institutional ownership
• investor attention
• stock return

Notes

1. French (2008) documents that, in the U.S. stock market, individual investors have been largely supplanted by institutions. Direct individual ownership of U.S. equities, which was 47.9 percent in 1980, fell to 21.5 percent by 2007.

2. Da et al. (2011) use U.S. stock market data and find that there is no long-term cumulative effect of investor attention on stock returns and that the positive short-term effect is completely reversed in the long term.

3. Baidu’s index data date back to June 2006 and are continuously updated. Recording these data is an enormous task. The reason we only collect data before March 2011 is that the data after April 2011 were not available when we began data collection. Updating the data would require significant staff time and resources but would have little effect on the findings of this article.

4. The same as Daniel et al. (1997), we build 125 benchmark stock portfolios according to the quintile of the three indicators—market capitalization (size), book-to-market ratio, and return momentum—and then take the average weekly return of each portfolio as a benchmark return. The difference between the monthly stock return and the benchmark return is DGTW excess return.

5. China Core Newspapers Full-text Database collects articles published in about 500 important newspapers in China from 2000, updated continuously. By October 1, 2012, the total article amount was more than 10 million.