Behavioral finance suggests that mispricing is positively related to corporate investment, and overvalued (undervalued) firms tend to over (under)-invest, which leads to the inefficiency of investment, and we studies whether institutional investors enlarge or reduce the impact of mispricing on investment, by decomposing the market-to-book ratio into mispricing and growth components. The result shows that investor sentiment directly affects the corporate investment. This investment- mispricing link is more pronounced in firms with higher institutional investor ownership. Our evidence suggests that institutional investors such as insurance firms and trust will amplify this link. This study can provide real economy with evidence, and evaluate the role institution play and economy impact, which have certain reference significance for the securities market regulation and policy making departments.
As investors heterogeneous beliefs, the existence of the risk and cost and arbitrage, lead to stock prices deviated from its fundamental value. According to behavioral finance, mispricing is usually caused by investors’ irrational expectations of stock value, and this is referred as investor sentiment. Liu proves that investor sentiment/mis- pricing affects the corporate stock price and in return, affects the corporate operation, especially the corporate investment decisions [
On the other hand, in order to adapt to the international situation development and active capital market, China Securities Regulatory Commission (CSRC) put forward in 2000 “extraordinary development of institutional investors”, as the important measure to improve the investor structure of the capital market. By 2011, the stock market value of tradable shares held by the institutional investors reached to 70%, with the high-speed development of institutional investors, concern about the institutional investors has arisen. Institutional investors can improve the pricing efficiency of stock, make it back to its fundamental value, and reduce the investor sentiment which can improve corporate investment efficiency. Institutional investors regarded as sophisticated investors, can better evaluation towards the firms’ relevant information, improving stock pricing efficiency which makes stock price reflect the fundamental value. Prior researches indicate that institutional investor can ease the degree of accrual anomaly. However, there are still studies suggesting that the participation of institutional investors can’t improve the pricing efficiency.
In reality, the period of managers in institutions is shorter than the normal investment cycle, and shorter than the time price fully reflects private information of managers, and these rise managers’ incentives pay more attention to short-term interests. Moreover, managers who are desperate for short-term interests are more likely to be involved in conspiracy with others. What’s more, institutional investors are momentum traders who tend to pursuit of historical price movements. Herd effect between the mutual funds deepens the price deviation degree. It has taken only about 30 years since stock market in China started to develop, and for the lack of legal norms, myopia of investor is very serious, which also makes institutional investors to chase for short-term gains and ignores whether stock price is under/overvalued or fundamentally valued. Prior paper indicates that funds’ holdings actually lower the market pricing efficiency regardless in the bearmarket or the bull market and the “‘leapfrog development’ of the institutional investors fails to lead to a more stable and rational market. The policy of institutional investors” “extraordinary development” does not make the market more rational. Thus this paper studies whether institutional investors improve the pricing efficiency.
Institutional investors as the important part of our capital market are hoped to improve the pricing efficiency of stock and investment efficiency. But there are a variety of reasons that may lead to adverse outcomes. This paper studies whether institutional investors improve corporate investment efficiency by inducing investor sentiment. Prior studies about institutional investors ignore the types of institutional investors. This paper controls the type of institution, and studies different impacts of institutional investors on the corporate investment.
Traditional finance theory suggests that stock price reflects the marginal output of capital―the investment opportunities. The link between stock price and investment is positive [
Equity financing channel theory suggests that investor sentiment affect the corporate investment through the issuance of stock or stock repurchase. If the enterprise has enough internal funds or stronger ability to borrow, is corporate investment irrelevant to stock price, or mispricing caused by investor sentiment? Polk & Sapienzause discretionary accruals as our proxy for mispricing [
Hypothesis 1: Mispricing and the corporate investment are positively related.
Corporate governance is an important measure to reduce agency cost, and effectively reduce the investment inefficiency. Institutional investors ownership regarded as an important part of corporate governance, are thought to directly participate in corporate governance Shleifer and Vishnyargue that institutional investors have the incentive to collect corporate information and monitor managementwhich improves corporate performance [
Prior research also provides empirical evidence of this “short-termism” view. Coffee suggests that if monitoring is costly or time-consuming, institutional investors prefer to activities that are in favor of firm’s long-term value, rather than corrective action [
Overall, the literature provides two essentially opposing views of institutional investors which we call monitoring and short-termism.
Hypothesis 2a: Institutional ownership enlarges the investment-mispricing relationship.
Hypothesis 2b: Institutional ownership reduces the investment-mispricing relationship.
For the differences among institutions in fund source, character, period and so on, different institutions may have opposing impact on the mispricing?investment relationship. Thus we examine differences among various types of institutions based on different influence on corporate action. All institutional investor have investment relationship with the firm, but some of them may have business relationship with the firm and economic activity of firm affect the institution’ interest, which result in conflict between institutions and firm. Brickley et al. have argued that institutions’ ability to influence firm may be limited by the extent to which institution depend on the firm. Some institutions that have business relationship with the firm they invest are more likely to maintain amicable business relationship. As a result, these institutions may be hesitant to involve in monitoring the firm [
On the other hand, the institutions that have no business relationship with the firm are regarded as pressure- resistant institution. Without the business relationship, these institutions have no interest conflicts and are willing to monitor the firm. We define fund, social security fund and QFII as pressure-resistant, and these institution place more emphasis on firm’s long-term value. In order to enhance firm’s long-term value, they also monitor firm’s activity including investment.
Hypothesis 3: Pressure-sensitive institutional ownership is more likely to enlarge mispricing-investment relationship.
Hypothesis 4: Pressure-resistant institutional ownership has no influence on mispricing-investment relationship.
Sample
We obtain annual corporate financial statement data from the CSMAR over the period 2009-2014. We exclude finance and insurance firms because the demarcation between operating and financing activities is not clear for these firms.
Dependent variable
Following Chen et al. and Firth et al., we define corporate investment (INVEST) as the change (from the beginning of financial year to the end of financial year) in net fixed assets plus depreciation, scaled by beginning- year values.
We measure institutional ownership as the fraction of a firm’s shares held by institutional investors and total leverage as a firm’s total debt divided by its total assets.
How to measure this mispricing is always a difficult problem. Most research using Tobin’Q or similar variables as a proxy variable to measure mispricing. However, these variables fail to distinguish whether mispricing or investment opportunity, and both of two factors have similar impacts on corporate investment. To solve this issue, this paper divide market-book ratio into two parts: mispricing and growth, by using the measurement of Rhodes-Kropf, Robinson and Viswana than [
According to RKRV model, mispricing at the firm level is the difference between the market value of firm i at time t and the fundamental value of firm i at time t,
We also other firm-specific variables as control variables. Growth represents corporate growth, using operation revenue growth. SIZE is natural logarithm of total assets. LEV is the leverage of corporate. ARETURN is the abnormal return of the stock. OCF is the net operating cash flow, scaled by total asset. CF is the cash holding, scaled by total asset. ROE is the roe (Rate of Return on Common Stockholders’ Equity) of the firm. FISR- THOLD indicates the ratio of the largest shareholder. SHRCR indicates the ratio of the second large shareholder. PAY is natural logarithm of salary of top 3 executives. ACCOV is the other receivables, scaled by total asset. SOE is the property right of firms.
Based on prior studies, we estimate the following regression equation to investigate the relation between institutional ownership and investment-mispricing sensitivity:
where INVi,t is corporate investment; Misi,t − 1 is the mispricing; INSi,t is the institutional ownership, and Misi,t − 1* INSi,t is the interaction of mispricing and institutional ownership. Growth represents corporate growth, using operation revenue growth. SIZE is natural logarithm of total assets. LEV is the leverage of corporate. ARETURN is
A: undervalued (Mis < 0) | ||||||
---|---|---|---|---|---|---|
Variable | Observation | Mean | Std | Min | Med | Max |
INV | 3981 | 0.0800 | 0.130 | −0.250 | 0.0500 | 0.860 |
Mis | 3981 | −0.430 | 1.370 | −69.95 | −0.240 | 0 |
Size | 3981 | 21.87 | 1.520 | 19.11 | 21.48 | 25.63 |
LEV | 3981 | 0.330 | 0.220 | 0.0500 | 0.280 | 1.120 |
CF | 3979 | 0.100 | 0.210 | −1.100 | 0.0900 | 0.760 |
CASH | 3875 | 0.280 | 0.210 | 0.0100 | 0.240 | 0.930 |
ACCVO | 3981 | 0.0100 | 0.0200 | 0 | 0.0100 | 0.190 |
ROE | 3981 | 0.0600 | 0.100 | −0.660 | 0.0700 | 0.460 |
Growth | 3976 | 0.190 | 0.440 | −0.610 | 0.130 | 3.570 |
lnage | 3981 | 1.850 | 0.800 | 0.690 | 1.950 | 3.180 |
Firsthold | 3981 | 37.99 | 15.99 | 8.940 | 36.72 | 75.25 |
B: overvalued (Mis > 0) | ||||||
Variable | Observation | Mean | Std | Min | Med | Max |
INV | 6796 | 0.0700 | 0.140 | −0.250 | 0.0400 | 0.860 |
Mis | 6749 | 0.240 | 0.190 | 0 | 0.210 | 2.090 |
Size | 8039 | 21.75 | 1.110 | 19.11 | 21.70 | 25.63 |
LEV | 8039 | 0.550 | 0.180 | 0.0500 | 0.550 | 1.120 |
CF | 8036 | 0.0600 | 0.230 | −1.100 | 0.0600 | 0.760 |
CASH | 6679 | 0.200 | 0.160 | 0.0100 | 0.160 | 0.930 |
ACCVO | 8039 | 0.0200 | 0.0300 | 0 | 0.0100 | 0.190 |
ROE | 8039 | 0.0700 | 0.150 | −0.660 | 0.0800 | 0.460 |
Growth | 8030 | 0.230 | 0.550 | −0.610 | 0.130 | 3.570 |
lnage | 8039 | 2.240 | 0.630 | 0.690 | 2.400 | 3.180 |
the abnormal return of the stock. OCF is the net operating cash flow, scaled by total asset. CF is the cash holding, scaled by total asset. ROE is the roe (Rate of Return on Common Stockholders’ Equity) of the firm. FISR- THOLD indicates the ratio of the largest shareholder. SHRCR indicates the ratio of the second large shareholder. PAY is natural logarithm of salary of top 3 executives. ACCOV is the other receivables, scaled by total asset. SOE is the property right of firms.
Model 2 examines the effect of institutional ownership on investment-mispricing link. To testify hypothesis 2 we are primarily interested in the coefficient of the interaction with institutional ownership (INS*MIS), and we find that the coefficient is positive and statically significant at 1% level. It implies that institutional investor is short-termism rather than monitor, together with that the investment-mispricing link is positive. The result provides evidence that institutional ownership amplifies the relationship between investment and mispricing, in consistent with Hypothesis 2b.
MODEL1 | MODEL 2 | endogenous | |
---|---|---|---|
2GSLS | |||
INV_LAG | 0.052*** | 0.048*** | 0.042*** |
(0.01) | (0.01) | (0.01) | |
Sent | 0.011* | 0.070*** | 0.765*** |
(0.01) | (0.01) | (0.08) | |
Inshold | −0.000** | −0.000** | −0.011*** |
(0.00) | (0.00) | (0.00) | |
INS*SENT | 0.003*** | 0.026*** | |
(0.00) | (0.00) | ||
Size | 0.024*** | 0.027*** | 0.039*** |
(0.00) | (0.00) | (0.00) | |
LEV | −0.00600 | −0.025*** | 0.0110 |
(0.01) | (0.01) | (0.01) | |
CFO | 0.155*** | 0.130*** | 0.171*** |
(0.04) | (0.03) | (0.03) | |
CASH | 0.051** | 0.040** | −0.0270 |
(0.02) | (0.02) | (0.02) | |
GROWTH | 0 | 0 | 0 |
(0.00) | (0.00) | (0.00) | |
DGROWTH | −0.036*** | −0.032*** | −0.024*** |
(0.01) | (0.01) | (0.01) | |
MFREE | 0.150*** | 0.135*** | 0.148*** |
(0.01) | (0.01) | (0.01) | |
ROE | −0.016*** | −0.017*** | −0.015*** |
(0.00) | (0.00) | (0.00) | |
FIRSTHOLD | 0 | 0 | −0.001** |
(0.00) | (0.00) | (0.00) | |
ARETURN | 0.018*** | 0.019*** | 0.0110 |
(0.01) | (0.01) | (0.01) | |
SHRCR2 | −0.008* | −0.010** | 0 |
(0.00) | (0.00) | (0.00) | |
LIANG | 0.012* | 0.0100 | 0.00800 |
(0.01) | (0.01) | (0.01) | |
PAY | −0.015** | −0.018*** | −0.010** |
(0.01) | (0.01) | (0.00) | |
LNAGE | 0.024*** | 0.027*** | −0.014*** |
(0.00) | (0.00) | (0.00) | |
SOE | −0.00600 | −0.025*** | −0.00500 |
(0.01) | (0.01) | (0.01) | |
cons | −0.320*** | −0.332*** | −0.263*** |
(0.07) | (0.07) | (0.07) | |
YEAR | Control | ||
IND | Control | ||
N | 5613 | 5613 | 5613 |
R2 | 0.170 | 0.203 | 0.198 |
Adjusted-R2 | 0.165 | 0.197 | 0.193 |
F | 32.73 | 39.36 | 36.23 |
In order to eliminate endogenous problem, we use natural logarithm of total number of shareholders as instrumental variable and employ 2GSLS method. By doing this we find that coefficient of interaction remains positive and significant at 1% level, in consistent with Hypothesis 2b.
Furthermore we examine the different impacts of institutions on investment-mispricing link. We divide institutions into two groups: pressure-sensitive and pressure-resistant. Pressure-sensitive institutional investors are referred to be involved in business relationship with the firm they invest, and they are more likely to be indifferent to firm’s activity. On the other hand,pressure-resistant institutions tend to monitor the economic activity of firms and pressure-resistant institutions will eliminate investment inefficiency.
Model 3 | ||
---|---|---|
Pressure-resistant | Pressure-sensitive | |
INV_LAG | 0.047*** | 0.045*** |
(0.01) | (0.01) | |
Sent | 0.011* | 0.00900 |
(0.01) | (0.01) | |
INS01 | 0 | |
(0.00) | ||
INS01*SENT | 0.00100 | |
(0.00) | ||
INS02 | 0.003** | |
(0.00) | ||
INS02*SENT | 0.008*** | |
(0.00) | ||
Size | 0.024*** | 0.024*** |
(0.00) | (0.00) | |
LEV | −0.00100 | −0.00200 |
(0.01) | (0.01) | |
CFO | 0.155*** | 0.159*** |
(0.04) | (0.03) | |
CASH | 0.0140 | 0.0130 |
(0.02) | (0.02) | |
GROWTH | 0 | 0 |
(0.00) | (0.00) | |
DGROWTH | −0.030*** | −0.030*** |
(0.01) | (0.01) | |
MFREE | 0.151*** | 0.152*** |
(0.01) | (0.01) | |
ROE | −0.016*** | −0.016*** |
(0.00) | (0.00) | |
FIRSTHOLD | −0.001** | −0.001** |
(0.00) | (0.00) |
ARETURN | 0.016** | 0.016** |
---|---|---|
(0.01) | (0.01) | |
SHRCR2 | 0.001*** | 0.001*** |
(0.00) | (0.00) | |
LIANG | 0.00900 | 0.0100 |
(0.01) | (0.01) | |
PAY | −0.011** | −0.011** |
(0.00) | (0.00) | |
LNAGE | −0.023*** | −0.023*** |
(0.00) | (0.00) | |
SOE | −0.00500 | −0.00500 |
(0.01) | (0.01) | |
cons | −0.289*** | −0.289*** |
(0.07) | (0.07) | |
YEAR | Control | |
IND | Control | |
N | 5613 | 5613 |
R2 | 0.177 | 0.180 |
Adjusted-R2 | 0.171 | 0.174 |
F | 31.57 | 32.13 |
institutional ownership (INS01*MIS or INS02*MIS). We find that the coefficient of interaction of pressure-sensitive institutional ownership and mispricing is positive and statically significant at 1% level. It implies that pressure-sensitive institutional investors are more likely to be short-termism rather than monitor, together with that the investment-mispricing link is positive. The result provides evidence that with effective monitoring, pressure-resistant institutional ownership amplifies the relationship between investment and mispricing. We also find that coefficient of interaction of pressure-resistant institutions ownership is not significant. These results are in consistent with Hypothesis 3.
We present two opposing effects of institutional ownership on corporate governance: monitoring and short- termism. In this view, we try to find out whether institutional ownership affects corporate investment. Behavioral finance suggests that mispricing is positively related to corporate investment, and overvalued (undervalued) firms tend to over (under)-invest. Thus mispricing results in investment inefficiency. As the large there are two competing views about institutional ownership, and that is what we want to distinguish. Our study providence is that institutional investor as a whole amplify the investment-mispricing link meaning that institutional investor tends to be short-termism and leads to investment inefficiency. Furthermore we find that different institutional ownerships have different impact on investment-mispricing relationship, and that pressure-sensitive institutional investors are more likely amplifying investment-mispricing relationship while pressure-resistant institutional investor has nothing to do with investment-mispricing relationship. Thus, our results cast strong doubt on effect of different institutional investor and provide evident to regulatory departments.
Weili Wu,Lian Wang, (2016) Institutional Ownership Mispricing and Corporate Investment. Open Journal of Business and Management,04,282-290. doi: 10.4236/ojbm.2016.42030