Rev Quant Finan Acc
DOI 10.1007/s11156-013-0355-y
O R I G I N A L R E S E A R C H
Price informativeness and institutional ownership:
evidence from Japan
Miao Luo bull; Tao Chen bull; Isabel K. Yan
Springer Science Business Media New York 2013
Abstract Using extensive intraday transaction and institutional ownership data of Japan, this study investigates the question of whether institutional ownership increases the extent to which equity prices reflect information about the firmsrsquo; fundamentals (the degree of price informativeness) and the roles played by various types of institutional investors. The results indicate that the presence of institutional investors, especially foreign institutions, increase the amount of information aggregated in the stock prices. Such relation is robust to various liquidity measures, possible presence of endogeneity in the ownership structure, and alternative measures of price informativeness.
Keywords Price informativeness Institutional ownership Japan
JEL Classification G14 G32 G34
1 Introduction
The 1997 Asian financial crisis aroused concern of global investors and popular media over the issue of information disclosure requirements of the East Asian emerging markets. Unlike in the Western developing countries, the information transparency of the listed companies in the East Asian countries, including Japan, China, Hong Kong, and South Korea, is generally lower. The lack of information transparency in these markets hinges heavily on the agency problem between managers and shareholders. One solution to this problem is to concentrate ownership and control in the hands of a few shareholders or blockholders like institutional investors (Liang et al. 2012). In doing so, these investors are able to exercise their voting power to monitor effectively the management. In the extant
M. Luo I. K. Yan (amp;)
Department of Economics and Finance, City University of Hong Kong, Kowloon, Hong Kong e-mail: efyan@cityu.edu.hk
T. Chen
Lee Shau Kee School of Business and Administration, Open University of Hong Kong, Kowloon, Hong Kong
123
M. Luo et al.
literature, even though the impact of institutional investors on firm performance is extensively discussed,1 less attention is devoted to study the effect of institutional investors on the information content of equity prices. This paper investigates this question by analyzing the relation between the degree of institutional ownership in a firmrsquo;s corporate structure and the amount of information carried in its stock price (henceforth the price informativeness).
There is growing number of studies in the literature that analyze the channels through which institutional investors affect the amount of information reflected in the stock prices. For instance, Piotroski and Roulstone (2004) argue that institutional investors often possess relative information advantage over minority shareholders as they can access more accurate information at lower costs, and have greater capability to gather private infor-mation. Grossman and Stiglitz (1980) also point out that high information acquisition cost tends to reduce stock price efficiency. These studies together imply that concentrated institutional ownership facilitates the incorporation of information into stock prices. Fur-thermore, Boehmer and Kelley (2009) suggest that institutional investors tend to exploit private information for trading purpose. These institutions, which are described as highly sophisticated investors, specialize in conducting timely arbitrage operations before their private information is priced in by the stock prices through transactions by competing traders (Campbell et al. 2009). Since institutional investors have greater incentives to become informed, such channel leads to the aggregation of private information into the stock prices (Edmans 2009). Therefore, recent studies (Gallagher et al. 2008; Brockman and Yan 2009) conceptualize institutional investors as informed traders and thus analyze their effect on financial markets.
Besides, institutional investors often hold dominant shares which enable them to control and monitor the corporate managers and hence ensure that their interests are served (Shleifer and Vishny 1997). This is a strategy commonly adopted by institutional investors to enhance the asset value of their portfolio. The active monitoring by the institutional investors also helps to align the interests between insiders and minority shareholders (Almazan et al. 2005), increase firm investment (Cronqvist and Fahlenbrach 2009), deter earnings manipulation (Burns et al. 2010), and improve corporate governance (Ferreira et al. 2011). Additionally, Morck et al. (2000) find supporting evidence that the presence of institutional investors is effective in curbing managerial expropriation as long as ownership rights are properly protected.
The studies discussed above all suggest a strong positive association between the degree of institutional ownership and the information content of stock prices, i.e. the price informativeness. This relationship is formally tested in this paper using intraday transaction and institutional ownership data of Japan. This paper further explores the roles played by various types of institutional investors, namely, foreign institutions, government and regional public authorities, securities companies, financial institutions, and other institu-tions in information transmission. A number of seminal studies suggest heterogeneous influence of different types of institutional investors on financial issues like antitakeover amendments, Ramp;D investment decisions, CEO compensation, and firm valuations (see, for example, Agrawal and Mandelker 1990; Bushee 1998; Hartzell and Starks 2003; and Ferreira and Matos 2008). However, few empirical studies have been cond
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