Title: Profitability, Institutional Investor and Stock Volatility Risk
Abstract: Along with the rapid development of the global capital market, stock volatility has been the core research area of the capital market. With the gradual improvement and development of China's capital market, a growing number of institutional investors are investing in the market. However, the market is still dominated by individual investors. Individual investors in China's domestic stock market account for 99.6 percent. The market value of shares in the ten thousand small and medium-sized investors accounts for more than 80 percent. At the same time, the development of China's securities market has a short history. As a result, many investors are lack of professional knowledge, risk identification, and self-protection ability. China's stock market investment characteristics also determine the arduous task of investor protection.Excessive market volatility not only increases the speculation risk of ordinary investors and speculators, but also increases the information transmission efficiency of the capital markets. To a certain extent resource allocation function of capital market tends to lapse. Thus, more and more scholars have been carrying out a series of studies on the volatility of the stock market. Practitioners and academia basically have reached the consensus that strong development of institutional investors is the future direction of China capital markets. Institutional investors are mainly value investors, which could contribute to market stability, reduce the risk of investors, and strengthen capital market function of value discovery. Moreover, the proportion of institutional ownership in China capital market has been at a higher level. However, others believe that institutional investors have become short-sighted investors, which is more difficult to see institutional investors relying on their own RD capabilities for taking advantage of investment opportunities. In addition, the funds' ranking pressure may cause the institutional investors to engage in short-sighted behaviors. These opportunistic behaviors cannot help promote value discovery and information transferring for institutional investors. Researches related to stock market fluctuations and influencing factors have no consistent conclusions regarding the role of institutional investors in capital market. However, improving the system of institutional investors is essential to the healthy development of Chinese capital market in the long run. Based on stock volatility risks, the paper mainly carries out from two aspects: 1) to investigate the relationship between corporate profitability and stock volatility risk, which could help examine whether and to what extent the risk of stock volatility can affect corporate profitability; 2) the existing literature mainly concerns about the direct relationship between institutional investors and stock volatility risk. The paper studies the effect of institutional investors on the stock return volatility risk by examining the role of institutional investors in transferring profitability information to securities market, and then analyzing the stabilizing mechanism of institutional investors. Based on the data of China's listed companies, our empirical analysis finds that the profitability of enterprises has a significant negative correlation with stock volatility risk. This finding indicates that the higher profitability the lower degree of information asymmetry between listed companies is. At the same time, with the increase of the proportion of institutional investors holding, a negative correlation between profitability and stock volatility risk becomes more significant. This finding shows that the presence of institutional investors could help transfer firm level information to the market, thereby reducing the information asymmetry between corporate and market, and reducing the risk of investors.
Publication Year: 2015
Publication Date: 2015-01-01
Language: en
Type: article
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