Institutional Investors and Stock Return Synchronicity: Evidence from Market, Industry, and Firm-Specific Information

Abstract

This paper examines the influence of institutional investor behavior on the stock_x000D_ return synchronicity using a sample of Taiwanese listed companies for the period_x000D_ 2000-2005. We find that stock prices reflect more firm-specific information for firms_x000D_ whose institutional ownerships are higher. Synchronicity is negatively associated_x000D_ with the number of shares held by foreign investors and securities dealers. The_x000D_ negative relationship suggests that the transactions of foreign investors and_x000D_ securities dealers increase the relative flow of firm-specific information to prices._x000D_ Stock prices contain more market- and industry-level information in firms with more_x000D_ securities investment trust companies’ shares or dominated by securities investment_x000D_ trust companies. The higher the change of ownership ratio of foreign investors,_x000D_ securities investment trust companies, and securities dealers, the lower the_x000D_ synchronicity is. This implies that more firm-specific information impounds into_x000D_ stock prices. From the simultaneous equation estimations, institutional investors and_x000D_ synchronicity are endogenously determined. The level of synchronicity influences_x000D_ the number of shares of these three parties, which in turn influences the level of_x000D_ synchronicity. The above results hold after considering the robustness tests of_x000D_ highly-market-value-weighted stocks and securities investment trust companies’_x000D_ strategies.